Our role is to protect pension savers, and we pay close attention to mergers and acquisitions involving UK companies which sponsor a DB scheme, particularly those which are highly leveraged.

Rarely a day goes by without news of a company in distress, or a high-profile deal to take over or acquire a business, whether it’s in trouble or not.

Recently, we have seen a slow-down in M&A activity and an increase in distressed situations — driven in part by challenging economic conditions. This means trustees should remain vigilant and follow our guidance which offers practical recommendations relating to acquisitions and how to spot signs of corporate distress.

We continue to monitor market activity and have engaged in a number of transactions where we feel there may be a risk to pension savers. We will maintain this approach. Our expectations remain clear. Trustees must be robust when defending the interests of scheme members and company boards and bidders must also treat the scheme fairly and equitably.

We expect outgoing and incoming executive management teams to support trustees to implement a robust funding plan, underpinned by cash and/or tangible security with proven sustainable value, which ensures members’ benefits will be paid in full, on time and when contractually due.

Treating schemes fairly means employers and bidders should communicate with schemes as a primary creditor when structuring any acquisition or financing package — and not treat them as a second-class citizen or an ‘after thought’ on which to impose a sub-standard arrangement as a fait accompli which does not protect members.

Employers must engage the scheme early

Economic turbulence caused by Russia’s invasion of Ukraine and the rise in interest rates in most developed economies this year have contributed to the reduction in M&A activity, as reflected in latest data from the ONS. Nonetheless, if an employer who sponsors a DB scheme is impacted by a merger or acquisition, it can have a profound impact on the security of members’ benefits so trustees must remain vigilant.

For some, conditions remain volatile. Latest data from the Insolvency Service shows the number of registered company insolvencies in July 2022 was 1,827. That’s 67% higher than in the same month in the previous year (1,096 in July 2021). Again, trustees need to stay alert to the risks presented to a scheme if their sponsoring employer is in financial distress.

Our work with schemes tends to track current trends, and we have engaged more in relation to M&A activity for the last year than with companies in distress, although we are monitoring developments closely.

However, the economic outlook is increasingly challenging, and trustees should be alive to signs of financial distress from their sponsoring employer.

We are clear in our guidance, including our Annual Funding Statement, that trustees are the first line of defence in ensuring pension scheme members are treated fairly in major corporate transactions, including M&As, and during restructuring exercises.

However, trustees should not be alone in protecting members. Employers and other companies within their parent group have a key role to play. We expect employers and other group companies to take account of members when negotiating corporate transactions involving pension schemes and ensure they are robustly protected.

While trustees must engage early, employers should immediately alert trustees about a proposed corporate transaction — they will know about it first. Trustees will be subject to strict confidentiality provisions and so employers should not use market sensitivity and regulatory notification provisions as an excuse to keep trustees in the dark.

We recognise that company boards have a duty of care to shareholders and will do all they can to deliver maximum returns in M&A scenarios. However, directors also have obligations to creditors, and in distressed scenarios a primary duty to them. Pension schemes are often significant long-term stakeholders and creditors and must be treated appropriately and, if necessary, we have powers to ensure that they are.

We expect trustees to engage with the scheme’s employers, and any prospective purchasers, to understand the status of a proposed transaction, its expected timescales, and its potential impact on the scheme covenant. This is often complex so trustees should consider using independent advisors to assist with their assessment.

Ultimately, we will stand behind trustee boards that are taking a robust approach but will intervene if we feel savers are not being protected. Where necessary we will use our powers, and may highlight the approach we took in a regulatory intervention report to ensure the market can learn from the action we take. Many of our scheme engagements do not feature in a report but they are happening nonetheless.

So, what does equitable treatment for schemes mean in practice?

Trustees should be provided with direct access to the bidder and their advisers at the earliest opportunity in the transaction process. This allows trustees to set out to bidders the liabilities in the scheme, make clear they will be assessing any potential detriment, and crucially to begin negotiating protections for savers.

Early access to the bidders and their adviser allows trustees to gain a full understanding of the transaction and financing structure, the bidder’s intentions in relation to the target business, and its proposed exit strategy and, at this point, what the position is to be for the scheme and its members.

Bidders should not move the goal posts

We also have clear expectations for those bidding to merge with or acquire a company which sponsors a pension scheme. We want bidders, including private equity firms, to show they have a clear, credible and well thought out business plan which considers the scheme’s long-term funding objective, backed up with robust corporate governance and underpinned by suitable protections for the scheme. Where the transaction or the proposed business plan impact the strength of the employer’s ability to support the scheme, we expect this to be reflected in tangible protections for the scheme.

What we do not expect is for an acceptable arrangement to be agreed on ‘day one’, only to be changed to a less robust plan on ‘day two’ once a transaction has taken place, which may be more favourable to the ‘new’ company and its revised board of directors. We would expect a legally binding agreement to be reached with the trustees ahead of completion, and strong governance protections to be put in place which ensure the independence of the trustee board including adequately removing or mitigating conflicts of interests. We have published guidance on conflicts of interest.

In what can be uncertain times, trustees need certainty for their scheme funding where the sponsoring employer or parent company goes through an M&A deal. Trustees should not weaken the funding position and journey plan to facilitate a transaction unless they can clearly demonstrate with reasonable certainty the benefit of doing so, and secure appropriate protections against downside risk.

We continue to monitor the market for major M&A transactions via several intelligence sources, and we encourage trustees and employers to contact us if they have concerns about a transaction. This could be done through our Customer Support team or via a scheme’s existing point of contact with us.

We will proactively engage with trustees, their advisers and employers and where necessary we will consider whether it is appropriate to use our range of powers to ensure savers are protected.

But one thing is clear. Employers and bidders in M&A scenarios are equally responsible for protecting pension savers as the trustees — they must all work together on equal terms to ensure the best possible outcome is reached.

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By Mike Birch
Director of Supervision