The new notifiable events regulations introduced as part of the Pensions Act 2004 and effective from 30th June 2005 could have a significant impact on all those involved in corporate transactions. The regulations require not only the trustees of Pension Protection Fund-eligible pension schemes to notify the Pensions Regulator (PR) of certain events, but also, in certain circumstances sponsoring employers.
Employer notification is required when action is taken that may impact on the funding of a scheme, such as a change in senior personnel or a change in the control of the business, both almost inevitable where a corporate transaction is involved.
Many company directors and indeed professional advisers involved in corporate restructures, may not yet be fully aware of the implications that the notifiable events regulations could have on such activity.
Corporate deals are typically acutely time sensitive and the involvement of PR in the process can only be likely to add complexity and lengthen negotiation process timescales. Directors would therefore be best advised to inform the PR of any notifiable events as early as practicably possible in the negotiation process. Proceeding without this notification and indeed without pre-clearance of the deal could be unwise and very expensive should deal terms need to be re-negotiated or the deal unpicked.
As part of this process the employer and their advisers need to make themselves aware of the balance of powers given to them and the scheme trustees at the point of any change. The employer and trustee powers outlined in the pension scheme Trust Deed & Rules could greatly strengthen the trustees position and place them at the heart of any negotiation process.
The PR will expect trustees to use their powers responsibly but to use them none the less and we have already seen some high profile examples of deals falling through at an advanced stage because the pension scheme solvency issue could not be satisfactorily resolved.
Given this background we are likely to see the emergence, amongst businesses where there is an intention to sell, of a more lengthy “grooming” process where pension liabilities are managed over a period of time in order to make the business a more attractive proposition to a potential acquirer.
Furthermore, the new regulations are increasingly likely to give rise to conflicts of interest, particularly for senior executives within the business who also act as pension scheme trustees. Clearly a director cannot know something about a company’s affairs as a director but claim to be unaware as a trustee and the director must be open and honest where such a conflict exists. The PR is clear that if such conflicts arise trustees will be expected not only to identify and properly manage them, but be seen by the membership and any interested third party to have identified and properly managed them. Undoubtedly ongoing corporate activity will bring these issues in to sharper focus and give rise to an increasing number of cases where performing both the role of company director and scheme trustee will be untenable.
Whilst it would be quite wrong to suggest that finance directors should not double up as trustees of the pension scheme – because in many circumstances they can add value to the process – it is nevertheless becoming increasingly difficult for them to live comfortably within these dual roles.
Unsurprisingly, we are already seeing evidence of financial directors opting to resign their positions as trustees rather than have to contend with all the various conflict of interest issues arising. Nevertheless, many other finance directors are reluctant to relinquish the valuable insight they can maintain through their dual role as trustees and FDs. Ultimately, it will be up to each individual FD to weigh up the relative risks and benefits of retaining or relinquishing their position as a trustee.
It is clear that finance directors need guidance as to when they can and cannot act. They can receive this guidance either from their professional advisers or by appointing a professional trustee to sit on the board to ensure that they are fully aware of all their responsibilities as trustees.
Either way, all a company’s board of directors – not just the FD – should take steps now to familiarise themselves with the notifiable events regulations. These extend beyond corporate restructures to include breaching banking covenants or a change in the employers’ credit rating. Directors need to ensure that they can fully comply with the requirements to minimise the risk of corporate deals collapsing at an advanced stage of negotiation.
David Davison is a Director at Spence & Partners, independent actuaries and consultants in Scotland and Northern Ireland.
Published in Financial Solutions Magazine February 2006