Why have pension scheme trustees been getting so involved in M & A deals?
Most final salary schemes are currently in deficit. Trustees have always tried to persuade employer companies to pay more into under-funded schemes, but the recent Pensions Act has effectively strengthened their hand. Trustees are now, in a sense, the eyes and ears of the new Pensions Regulator and have its powers to back them up.
Which powers do you mean?
In basic terms, where the Regulator believes that an employer is trying to avoid its scheme liabilities, or is insufficiently resourced, it can serve a notice on the employer and certain persons connected with it, such as group companies and shareholders, requiring them to make good the scheme’s deficit.
Why does this affect M & A deals?
Companies are required to tell the Regulator about events that may prejudice a scheme’s future solvency and, if necessary, to obtain clearance. Such ‘events’ could include a change in the group structure, the company granting a debenture over its assets, or carrying out a “large or unusual” return of capital by means of a dividend or share buy-back. So a highly-leveraged takeover may well be a notifiable event.
What does the Regulator want trustees to do?
To question companies about transactions that could disadvantage their scheme and to use the implicit threat of the Regulator’s involvement to ensure that deals are structured in a way that safeguards the scheme’s solvency. Generally it wants trustees to act more like bankers or commercial creditors when dealing with the company: they should act independently and negotiate robustly to try to obtain contributions to the scheme. Sometimes they may need to investigate any claims by the company as to what it can afford to pay or even to employ accountants to investigate the company’s finances.
So trustees who are also directors of an employer company could be in a difficult position?
Yes. The new rules make it increasingly difficult for the finance director or CFO, or anyone in a senior position in the company’s finance function, to continue to be trustee of a final salary scheme. And things won’t be much less difficult for a trustee who is also the company’s chairman or CEO.
What if a director/trustee has information that would help the scheme?
Generally trustees must put their trustee duties ahead of their company duties. This means that they should divulge to fellow trustees any information they have about the company and its finances if that information is relevant to the issues being considered by the trustees. By appointing them as a trustee, the company is deemed to have agreed to this disclosure, although when it appoints a new trustee the company may be able expressly to limit his duty to pass on information. To avoid a conflict, a director/trustee may also be able to absent himself from relevant meetings.
If trustees request information about the company’s finances, how can the company ensure it remains confidential?
According to the Regulator, all trustees should be willing to sign confidentiality agreements with the company. Whilst that does not guarantee that information will not leak out, the Regulator has said that it may remove a trustee who breaches a confidentiality agreement. In some circumstances, unauthorised disclosure by a trustee can also be a criminal offence.
This article originally appeared in Directors’ Digest (June 2005) – a CMS Cameron McKenna publication.
