Proposed new TPR powers will bring major changes to how pension plans are treated in M&A deals.
Defined benefits plans have long been a key consideration for buyers, sellers and pension trustees in corporate transactions – in some high profile cases even acting as a blocker to a deal. But it’s also true that ‘clearance’ applications have dwindled from over 250 in the year after TPR came into being in 2006, to a handful over the last few years. In large part, this is because there is a greater understanding of TPR’s expectations and consequently buyers and sellers have become more comfortable going ahead with transactions and dealing with the pension trustees on the other side.
In most cases the commercial parties ‘behave themselves’ and pension plans are ultimately treated fairly. Nevertheless, on the back of some high profile corporate failures where underfunded pension schemes have been left stranded (notably BHS and Tata), DWP has consulted on giving TPR more teeth to protect schemes in deal situations.
The response to the consultation was released this month and confirms the government's intentions to legislate to give TPR more ability to act before a transaction takes place (in contrast with its current, retroactive powers). In particular, the government intends to require:
The government also intends to strengthen TPR’s powers to impose and enforce its current anti-avoidance powers (financial support directions and contribution notices) and allow it to levy potentially unlimited fines, and impose jail sentences of up to 7 years on those acting 'wilfully and recklessly' in relation to a pension scheme.
The intentions remain light on detail in a number of areas and raise a number of questions around how workable they are in practice - given factors such as the tight timescales many corporate transactions work to, and how to design the rules to avoid capturing numerous trivial 'business as usual' corporate events. However, we are already seeing TPR taking a more proactive approach, for example reaching out to schemes where M&A activity is in the public domain. In future, we anticipate trustees will seek to use their 'seat at the table' to try and extract more value in deals. This could make target companies with big schemes less attractive, and the need to involve trustees and their advisors before signing a deal will complicate many transaction processes.
What is clear is that if you are considering M&A or restructuring activity, treating the pension scheme as an afterthought or waiting until after a deal to speak to pension trustees will no longer be an option - forward planning on this issue will be vital. If you have corporate activity on the horizon which could be impeded by pensions, get in touch with Ian Elphick, Mike Smedley or your usual KPMG pensions contact to discuss how we can help.