The Pensions Regulator (TPR) has urged companies considering any merger and acquisitions (M&A) activity to engage with pension scheme trustees from the outset, emphasising that it will take action to ensure savers’ interests are represented.

Speaking at the UK Finance Corporate Finance Committee dinner, TPR chief executive, Nausicaa Delfas, acknowledged that pensions are at a moment of “significant change”, moving from a one-scheme, one-employer environment to a marketplace of schemes and providers competing for business.

She also pointed out that, for a variety of reasons, defined benefit (DB) pension schemes are currently very well-funded, "in fact the best they have been for at least 15 years".

"We estimate that as of September, over 80 per cent of schemes are in surplus on their technical provisions compared to around 50 per cent at the start of 2022," she said. "And over half of all DB schemes may have sufficient funds to buy out their liabilities with insurance companies should they choose to do so."

And with corporates and sponsoring employers on the hook for these schemes, Delfas suggested that this improved funding position of pensions may also make businesses more attractive to M&A activity.

"As a regulator, when it comes to M&A activity, we are not here to prevent transactions – but we are here to make sure savers’ interests are protected," she stated, stressing the need to ensure that the pension scheme is treated equitably alongside other creditors.

Responsibility for this lies across the board, as while Delfas identified trustees as the first line of defence for scheme members, she confirmed that TPR also expects the outgoing and incoming executive management teams to support trustees to implement a robust funding plan.

This, according to Delfas, should be underpinned by cash and or tangible security with proven value, which ensures members’ benefits will be paid in full, on time and when contractually due.

“Where M&A activity takes place without mitigating against potential harms to the scheme, we consider that to be avoidance,” she continued, pointing out that TPR has a number of anti-avoidance powers including Financial Support Directions and Contribution Notices.

Delfas also noted that the government has committed to extending the type of events that trustees and employers must notify the regulator about under the Notifiable Events regime to support this, with the government set to bring forward final regulations "in due course".

Regardless of this, she argued that early engagement from corporates with both trustees and the regulator is key to ensuring a successful outcome in M&A activity.

In the meantime, Delfas also said that TPR still expects trustees to reach out to the regulator, confirming that TPR will also take the initiative to talk directly to employers, group companies, third-party purchasers and bank.

“We can respond quickly to meet commercial deadlines through this process and will assess transactions where there is material detriment to the scheme, and to ensure there are appropriate mitigations in place," she continued.

“We also monitor market activity and proactively engage where we think there could be a risk to pension savers. Often that is where there are companies in distress but increasingly in relation to general M&A activity.

“Our intelligence team gather market intelligence, whistleblower reports, and information from other agencies, like HMRC or the insolvency service, sharing information where we have appropriate gateways.”

Delfas also confirmed that both trustees and TPR are subject to strict confidentiality provisions, arguing that market sensitivity should not be seen as a barrier to engagement.

Those wanting extra assurance that the regulator will not use its anti-avoidance powers in the future can also approach TPR for clearance on a transaction, to ensure they don't face any "nasty suprises".

More broadly, Delfas suggested that, if trustees are receiving the information they need, have the required level of experience and advisory support, and are taking a robust approach in defending scheme members’ interests – it’s unlikely TPR will intervene.

However, Delfas stressed that, if that’s not the case, and savers’ hard earned retirement incomes are threatened, TPR will intervene.

“First via supervision, where we will look to resolve risks consensually without the use of powers,” she explained.

“But if agreement can’t be reached, then escalating that engagement to an enforcement case. Using our powers is a last resort.

“Our goal is always to try and reach constructive solutions with both the trustee and the corporate.”

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