Pensions risk (and how to manage it) can often have a big impact on transactions – particularly when buying or selling a distressed business in a short timeframe.
We set out below some of the pensions matters (and solutions) we regularly see on fast-paced M&A deals (both solvent and insolvent).
Pensions Due Diligence
Compressed DD is part and parcel of accelerated M&A. Where there is a short timeframe, the key is to focus pensions DD on the right areas. The bigger risk is where there is a defined benefit ('DB') scheme in deficit as opposed to a defined contribution ('DC') scheme (where there are not generally funding deficits). How to factor in COVID when doing DD on DB pensions liabilities will be crucial. Throughout lockdown we’ve seen the benefits of setting clear expectations between trustees and employers about information sharing. This framework can be helpful in a distressed scenario where access to management might be more difficult than usual.
On some deals, taking on a level of DB pensions risk might be acceptable with the right protections. We have advised recently on a transaction that had a pensions indemnity mechanism entirely separate from the sale and purchase agreement. The parties agreed in advance how to slice up estimated future funding liabilities in order that pensions wouldn’t hold up the sale process.
Working with the pension trustees
How much to tell the pension trustees, and when to do so, is a key factor on any transaction.
In a distressed scenario, forward planning and collaboration with the trustees before (or at the latest at the start of) the sale process might help a challenging deal go through where it otherwise may not. Where timeframes are tight, we have seen it can help to make the information exchange more 'formal' – for example, agreeing confidentiality agreements with the trustees and explaining what information is (or is not) being provided and why.
How to mitigate regulatory risk
The Pensions Regulator ('tPR') has strong powers in certain scenarios to require parties who are 'connected or associated' with a sponsor of a UK pension scheme to make payments to the scheme. Understanding when these powers are in play is vital. It can include where there is a distressed business sale (if, for example, a deal was rushed through leaving the pension scheme abandoned or short-changed).
Where insolvency is inevitable, there are a number of pensions restructuring options that legitimately allow for the separation of a business from its DB pensions obligations. Deals where the existing employer is rescued are rare and will almost certainly need the input of the Pension Protection Fund ('PPF') and perhaps tPR. The key is to structure the deal from the outset to meet the PPF’s principles and to mitigate any trustee argument that the scheme is being treated unfairly.
There is also a formal statutory process to ask tPR to confirm it will not use its powers in relation to a transaction. Whilst this has been seldom used in recent history, it may become more common again with the wholescale changes being made to the pensions landscape by the Pension Schemes Bill (see more below).
Aside from the trustees, who needs to be formally notified of what and when?
- tPR – tPR has to be notified of certain events in any case. An interesting thing about the notification regime is that the 'trigger' for notification can be earlier than you might think (for example, it may be the directors’ decision to proceed with a transaction rather than the transaction itself).
- Members. Buyers and sellers will also need to consider the timing and content of member communications. There might also be pensions requirements to consult with employees (alongside any employment ones).
The Pension Schemes Bill (the 'Bill') – what changes will impact M&A?
- New notification and information sharing requirements are coming. Those involved with corporate transactions will need to build time into their transaction planning to formally communicate with trustees and tPR under new statutory information sharing obligations.
Firstly, the Bill is expanding the events about which it has to be notified. This is expected to include a sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for a least 20 per cent of the scheme’s liabilities.
Secondly, the Bill is introducing a new 'declaration of intent' obligation for those involved with corporate transactions. What information must be included in a declaration and the precise timing is not yet known (the detail has been left for secondary legislation we are yet to see) but based on the Government’s consultation process, we expect it will include the nature of the proposed transaction, confirmation that the 'corporate planner' has consulted with the trustees (and whether they agree), an explanation of any detriment to the scheme and where there is detriment, how this will be mitigated.
Whilst some transactions in Autumn 2020 might be completed before the Bill and secondary legislation become law, other transactions from the end of the year onwards may be caught by the new requirements. We expect directors will, more than ever, want to plan ahead (with their advisors) about the impact of a transaction on a pension scheme (especially when transacting in a compressed timescale).
- tPR’s powers are getting stronger (and there are new criminal offences). The new powers and offences in the Bill are deliberately drafted very widely for policy reasons. They have the potential to catch routine business transactions. In particular, there is a criminal offence around 'conduct that risks accrued benefits' which will be relevant to distressed M&A and will be punishable by an unlimited fine and/or up to seven years in prison. tPR is also getting powerful investigative and information gathering powers (including power to summon individuals to interview and to inspect premises). Anyone involved with M&A (whether distressed or not) where there is a defined benefit pension scheme will want to assess and mitigate regulatory risk. Particularly because some elements of tPR’s powers may have retrospective effect to apply to transactions happening now.
Our team of 40 Pensions specialist lawyers is and has been involved with various leading regulatory cases (such as Desmonds, Coats, Macdonalds, Great Lakes and others – many are confidential as they are necessarily commercially sensitive).
If the Target participates in a DC scheme, does this mean there is no pensions risk at all? Not quite (but the risk is greatly reduced).