Corporate M&A and restructuring specialists have always had to traverse
any number of potential elephant traps in their attempt to create new entities
with more commercial logic and rigour to them, and less historical baggage.
However, there is considerable disquiet in the sector as to just how the new
powers given to the Pensions Regulator will play as far as significant corporate
transactions are concerned. The problem comes from the fact that the Pensions
Regulator now has the power to look through any corporate transaction that it
feels has the effect of leaving the pensioners disadvantaged.
Craig Anderson, KPMG senior partner for Scotland and head of transaction
services in Scotland argues that the reach and scope of the regulator’s powers
have not yet been fully appreciated by bankers, venture capitalists, corporate
advisors and pensions fund trustees.
“Basically, the key point to bear in mind is that if you are doing a
transaction that could potentially be regarded as prejudicial to pensioners, you
have two choices.
You can put your head above the parapet and seek clearance from the Regulator
in advance, or you can wait to see if the Regulator gets alerted by your
trustees later down the line,” he says.
In Anderson’s view, however, David Norgrove, the chair and chief executive of
the Pensions Regulator board, is an eminently pragmatic, logical and reasonable
person, so providing there is not an intention to ‘dump’ or weaken the company’s
commitment to its funding obligations, people should feel able to argue their
A spokesperson for the Pensions Regulator outlined the “key test” which the
Regulator will apply when deciding on any company transaction. “Basically one
should think of the fund as an unsecured creditor from whom the company has made
a substantial borrowing. Is the proposed transaction likely to have the effect
of weakening the position of the trustees? Does it threaten the strength of the
employer’s covenant?” If the answer to this is ‘yes’, or ‘probably’, then the
Regulator has two options. It can impose an immediate contribution demand on the
company, of the form: ‘You will pay the fund £50m now’, or it can impose a
financial support directive, which means that regardless of whatever
restructuring has taken place, the parties served with the directive must
continue to support the fund.
KPMG’s Anderson points out that all kinds of transactions fall into this
‘trap’. Even a share buyback could trigger action from the Regulator, if the
buyback is being done with debt, and so increasing the company’s gearing.
A spokesperson for the Pensions Regulator says: “Trustees need to ask
themselves, ‘Will I feel as comfortable about the company’s covenant after this
transaction has taken place, as I do now?’ If they don’t, call us and we’ll look
into it,” he says.
Graeme Sloan, from Maclay Murray & Spens adds: “Life has become more
complex for dealmakers as far as potential liabilities are concerned.
What is driving the extension of deal timetables is that the diligence
process has been extended. If you are dealing with a highly leveraged purchaser,
you do not want the Pensions Regulator coming along after the fact and saying
now is the time to make a hefty contribution to the fund.”
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