TPR urges trustees to remain vigilant to employer distress

The Pensions Regulator (TPR) has urged pension scheme trustees to "remain vigilant" to the signs of employer distress amid recent economic challenges, although it clarified that employers are as "equally responsible" for protecting pension savers as trustees.

In a blog post, TPR director of supervision, Mike Birch, confirmed that the regulator has been paying “close attention” to mergers and acquisitions (M&A) involving UK companies that sponsor a defined benefit (DB) scheme, particularly those which are highly leveraged.

However, Birch clarified that while TPR has engaged more in relation to M&A activity for the last year than with companies in distress, the "increasingly challenging" economic outlook is prompting a slow-down in M&A activity and an increase in distressed situations.

In light of this, Birch encouraged trustees to "remain vigilant" and follow TPR guidance, arguing that "trustees should be alive to signs of financial distress from their sponsoring employer" as the "first line of defence" in ensuring members are treated fairly in corporate transactions.

He also said that trustees need certainty for their scheme funding where the sponsoring employer or parent company goes through an M&A deal, statihng that 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..

Birch stated: "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."

In particular Birch argued that schemes should be treated as a primary creditor when structuring any acquisition or financing package, and should not be seen "as a second-class citizen or an ‘after thought’ on which to impose a sub-standard arrangement".

However, Birch clarified that trustees “should not be alone” in protecting members, arguing that 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,” he continued.

“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.”

Birch also clarified that TPR has “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,” he stated.

“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."

More broadly, Birch confirmed that the regulator will stand behind trustee boards that are taking a "robust approach", clarifying however, that TPR will intervene if savers are not being protected.

“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,” he continued.

“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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