Changes to the Takeover Code, announced in the last month and due to take effect on 20 May 2013, aim to increase the transparency of defined benefit pensions in listed company acquisitions and allow pension scheme trustees a greater degree of involvement in such deals.

The Takeover Code is a binding set of rules that apply to listed companies in the UK. The changes will apply only to pension schemes that provide some or all of their benefits on a defined benefit basis. Defined contribution schemes had been included in the consultation published on 5 July 2012, but have been excluded from the changes being implemented.

Key changes relate to:

  1. Details of the bidder’s intention for the pension scheme;
  2. Greater access to key documents and information;
  3. Opportunity for the trustees to voice their opinion on the effects of the offer on the scheme; and
  4. Disclosure of information on future funding agreements.

The bidder must state its intentions for the pension scheme, specifically with regard to: employer contributions (including the scheme funding arrangements); accrual of benefits for existing members; and admitting new members. Unless there has been a material change of circumstances, the bidder will be regarded as being committed to the statement for 12 months from the date when the offer period ends (or longer if the statement provides for a longer period).

The target company’s trustees will enjoy the same rights to bid information and documents as the target’s employee representatives. These include:

  1. The announcement starting the offer period;
  2. The offer document;
  3. The announcement of a firm intention to make an offer; and
  4. Target board circulars in response to any revised offer document.

The trustees will also be able to elect to provide the target company with an opinion on the effects of the offer on the pension scheme, which, provided that it is received in good time, must be included as an appendix to the circular on the offer to the shareholders. Alternatively it must be published on a website and the board must announce that this has been done.  Any costs incurred by the trustees in relation to the opinion will be borne by them, not by the target company. Where offers have been made before the effective date of 20 May 2013, the trustees can require their opinion to be appended to the board circular even if the offer document was published before this date.

Pension schemes are not being given any greater protection under the new changes and the trustees have no legal power to stop a deal going through. There is no requirement for the bidder to produce a statement on any likely impact of the deal on the target’s covenant or whether it can continue to meet its funding obligations, something which is likely to be the trustees’ key concern, because it was thought to be disproportionate and would result in meaningless disclosures.

The Takeover Code is however designed only to protect the target’s shareholders and the stated intention of the proposed changes was to ensure that the pension scheme would become a debating point during the course of the offer. The changes will hopefully encourage companies to consider pension schemes more carefully in light of potential acquisitions and the increased transparency for trustees is a welcome change.