By Chris Parlour, Senior Consultant, XPS Pensions Group
Although the impact of the proposed changes is likely to be limited for the vast majority of employers, the consultation aims at ensuring TPR is better equipped to step in where it is believed an employer is putting their pension scheme at risk.
Under the proposed new framework, sponsoring employers will be required to make a statement of intention, setting out the nature of the planned transaction, its implications for the pension scheme and how any risks will be mitigated. The declaration of intent framework will cover the following types of corporate activity:
• the sale of controlling interests in a sponsoring employer;
• the sale of the business or assets of a sponsoring employer; or
• the granting of creditor priority above the pension scheme.
A declaration of intent will take the form of a written communication addressed to the trustees and copied to TPR.
Risk based criteria are going to be set by TPR in due course to determine when an employer will have to produce a declaration of intent. Not every transaction covered under the framework will automatically be caught – some may be exempt, for example, if the pension scheme is fully funded.
The proposed changes to the notifiable events framework will result in much earlier consideration of the pension scheme and engagement with TPR if the event is one of the three types listed above for which a declaration of intent will be required. At present, employers are only required to notify after an event has taken place, which has minimal impact on the transaction. Under the new framework, employers will be required notify as soon as an agreement in principle has been reached. A declaration of intent would then be required after due diligence and transaction financing have been finalised, but before a sale and purchase agreement is signed.
The proposals on the declaration of intent could therefore signal a significant change in how pensions will need to be taken into account in transactions. A key consideration previously had been when in a sale process to engage with trustees – before, during or after the deal has been signed. Subject to any thresholds or risk based criteria that are set, the option to engage post transaction may no longer be viable.
Given the proposed widening of TPR’s powers to impose larger civil and even criminal sanctions, it will also mean companies and investors are likely to want some formal comfort (i.e. clearance) from TPR before involving themselves in a transaction that has implications for a pension scheme. Absent of a significant change in resourcing and response times from TPR this may stop some transactions being possible – for example, any buyer of a listed entity has to make a binding offer within 28 days of announcing a firm intention to bid under the City Code. TPR may therefore need to be substantially more responsive when certain types of transactions are referred to it, otherwise some deals could have to be abandoned
There is no detail on what the new clearance regime might look like in the consultation document. Given the potential criminal consequences alongside easier to apply anti-avoidance powers some beneficial transactions may not be able to proceed without the TPR’s approval process being completely revamped. The deal market really will need clearance to be possible in a much shorter timeframe than historically. Other changes such as including a new “soft” clearance process for cases where there is no detriment to the pension scheme could also be really helpful.
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