The Takeover Panel is consulting on a possible extension of the Takeover Code in relation to pensions. The proposals would require bidders for companies subject to the Code to explain their plans for the target's pension scheme up-front. Added to this, scheme trustees would have the right to append their opinion on the offer to the target board's circular (or put it on a website).
The Panel's suggested changes to the Code would extend to the trustees of the target's pension scheme rights and would be comparable to those applying to employee representatives.
Under the proposals:
- the bidder must state its intentions with regard to the target's scheme and the likely repercussions of the bidder's strategic plans for the target on that scheme;
- if no changes are intended, or the bidder considers that its strategic plans will have no repercussions for the scheme, it must make a statement to that effect;
- the target board's circular must set out its opinion (and the reasons for its opinion) of the effect of the offer (and any alternative offers) on the scheme and the repercussions referred to above;
- statements made by the bidder or target board will be binding for a period of 12 months, unless there is a material change of circumstances;
- certain documents must be made available to the trustees;
- the trustees may append to the circular their opinion of the effects of the offer (and revised offer) on the scheme (or publish the opinion on a website); and
- if the bidder and trustees reach an agreement on the future funding of the scheme, then a summary must be included in the offer document and the agreement published on a website.
Will trustees have access to valuable new information?
One problem trustees face in a takeover situation is collating the necessary information for a meaningful covenant review of the bidder and its implications for the pension scheme.
The proposed changes to the Code suggest that trustees will get more information earlier in the process. However, the documents to be made available under the Code are essentially those that will be in the public domain, or easily accessible to the trustees; this is not valuable new information. Professional covenant advisers will still be needed and there is no great stride forward here in helping the covenant adviser give advice if the bidder chooses to disclose only the bare minimum.
On the positive side is the requirement for the bidder to state its 'intentions', 'strategic plans' and 'likely repercussions' for the pension scheme. That will be of more interest to the trustees. While the language is somewhat vague, it would be difficult to avoid disclosure of plans likely to have a significant impact on the scheme. As ever, much will hinge on how this requirement is interpreted in practice as one person's minor event is another's material issue.
Will the proposed changes have any practical impact on scheme security?
In terms of the security of the scheme, the proposed changes are unlikely to have a significant impact in practice where a bid is recommended. Currently, where a takeover might have detrimental impact on the employer covenant (the ability of the company to meet its pension liabilities) the parties to the takeover will usually involve the pension scheme trustees at an early stage. This is to ensure that the trustees are comfortable with the takeover.
The parties will be aware of the trustees' ability to seek the intervention of the Pensions Regulator with its moral hazard powers if they remain concerned. In that situation, trustees will seek to negotiate mitigation for any potential detriment. The same will probably occur under these proposals.
A revised Code is likely to remind everyone to bring the trustees to the table earlier than sometimes occurs now. This will allow more time for the trustees to influence bidders on future provision for the scheme or involve the Regulator, if necessary.
Are the changes necessary?
Getting more information and an earlier seat at the table to discuss the impact of corporate change on the scheme may well not offer much tangible protection to schemes. However, it will force bidders to consider the scheme in advance and potentially give trustees the opportunity to influence that thinking.
From our experience, a lot of employers already discuss corporate change with trustees in advance, recognising the potential impact on employer covenant and the need to consider the implications for the scheme and its funding. Most are mindful of the Regulator's powers in this arena too.
Therefore, the biggest practical change is likely to be for those trustees who traditionally would have been kept in the dark about a takeover until the last minute. Those trustees are now likely to find out about corporate change earlier in the process. They will also have the opportunity to influence the bidder's view of the scheme as a part of the takeover or involve the Regulator, if necessary, rather than trying to salvage the position after the event.
What about hostile bids?
In hostile bid situations, the proposed changes might, in a small number of cases, actually increase the bargaining power of the trustees. Both the bidder and the company may be keen to get the trustees on their side, as the trustees will have the right to append their opinion of the offer to the company board circular. Where there is any concern that the employer covenant may be adversely affected, the trustees' opinions would at the very least be highly public and could even be influential.
The intention of the changes appears to be to facilitate debate, rather than reaching any hard and fast agreement. Yet, in reality, this may allow trustees to exert more influence with the bidders, so potentially increasing the scheme's funding security.
Will the employer have to pay for the trustees' advisers' fees?
No. Although the proposals provide that the company pays for the publication costs of the trustees' opinion, the costs of the trustees' advisers will not fall directly on the company. The Code Committee was concerned that significant costs might be incurred which would give rise to disputes over what costs had been reasonably incurred. We agree with the Code Committee that there is no need for the Code to require payment by the company. Particularly given that costs reasonably incurred by the trustees will usually be the responsibility of the company.
Will the changes impact on a bidder's proposals for future service?
The proposed changes might have a marginal impact on bidders' arrangements for future service. Essentially, the bidder will have to state its intentions and any statements made by it or the company in relation to any intended action affecting the scheme must be honoured for 12 months. The only exception to this is where a change in material circumstances occurs (the circumstances that would count as material are not defined).
At present, without the changes, it can sometimes be difficult to tie bidders down on their proposals for the future. Twelve months is not long, but it will at least bring future service benefits to the forefront of the bidder's mind (the Panel's reason for not suggesting a longer period was that the aim of the proposals was to facilitate debate).
Obviously, in contested bid scenarios rival bidders will each be aware of the other's future pension costs - in the short-term at least.
Are the proposals appropriate?
The way in which takeovers are handled can vary greatly; from the most friendly of mergers, to significant hostility. Legislating for all styles of takeover is therefore difficult. Also, the Code is designed to protect shareholders; it is not another form of pension scheme protection - that is ultimately the job of the Regulator.
We consider the proposals are a step in the right direction. If the Code became too strict this could scupper deals for employers badly in need of them. Perhaps the Code does not go far enough for cases of a hostile takeover situation; particularly at the aggressive end of the spectrum where a compulsory reference to the Pensions Regulator in situations where there is no agreement on a scheme's funding may have proved helpful. But given the Code's role, we agree with the Code Committee that adding a compulsory reference to the Regulator would be a step too far.
Also, once the deal is done, it will be much more difficult to retract the reassurances given to the trustees, at least for the first 12 months. This would give time for trustees and the Regulator to react if all is not as it seems.
The proposed changes to an extent formalise what in many cases is the current practice. However, the benefit they would bring is to give trustees a seat at the table in cases where they are currently excluded from takeover discussions until the last minute.
The formal involvement of the trustees at an early stage is, in our view, inevitable and will be welcomed by most, although the industry reaction to date has been muted. In those rarer hostile situations, the Code may give trustees (and the Regulator where appropriate) the opportunity to protect the pension scheme before the takeover, rather than trying to salvage the position after the event.
In our view, this proposed approach strikes the right balance between shareholder interests, which the Code sets out to protect, and giving the pensions protection regime the breathing space to act to protect schemes if necessary. It also means that bidders cannot give warm and reassuring noises to trustees behind closed doors but then do something completely different before the ink is dry on the deal.