Pension Schemes with Overseas Parent Companies
‘Well you can tell your Pensions Regulator….’ comes the voice over the conference call phone. A not unfamiliar scene during a pension trustees’ meeting when discussing a new funding proposal with an overseas parent company.
There are several barriers to effective interaction between UK pension scheme trustees and overseas sponsors (or the overseas parents of UK sponsors). I explore these below, and consider what lessons can be learned from those schemes that enjoy good working relationships with their overseas parents.
Common reasons for conflict include:
An unusual trust structure: Pension schemes are just not set up in the same way overseas as they are in the UK. Our pension legislation is much more onerous and complex than that which exists in many other jurisdictions. The pension implications arising from corporate restructuring, the requirements of our Regulator and the liability of employers on scheme wind up are all unusual, sometimes unexpected and often resented concepts for overseas based companies to understand and come to terms with.
An area which is particularly under-appreciated is the governance framework within which UK pension scheme trustees have to operate. Often, trustees are seen by overseas sponsors as being obstructive or seeking to interfere in company business. It’s easy to see why this might be the perception where the sponsor is not familiar with the roles and responsibilities that UK pension trustees are required to fulfill.
Difficulty in obtaining ‘local’ specialist advice: Almost all UK pension scheme sponsors will seek advice independent to that being provided to the trustees. This may be in relation to liability management, the way in which funding plans are set up or the best way to manage corporate restructuring. Rather than inciting conflict between the trustee board and company management, good independent advice ensures that the sponsor is aware of all the issues, that they understand the requirements of the trustees in each situation and that they have clear guidance around the options which are open to them.
More often than not, this leads to a constructive dialogue between the trustees and their sponsor. A barrier to this dialogue between the trustees and overseas parents is that this UK-specific pensions advice can be difficult to source in areas outside of the UK and, even where independent advice is taken, it may be received second hand by the overseas parent – where the advice is initially provided to the UK subsidiary. Issues can also arise if the interests and objectives of personnel at the UK sponsor are not perfectly aligned with those of the parent, as is often the case.
Communication and culture: From language barriers to the requirement to travel long distances to attend trustees’ meetings, developing and sustaining a good working relationship with overseas sponsors can be a challenge for trustees. Without this, sensitive negotiations around funding and investment strategies are much more difficult as there is a lack of empathy or common ground to help keep discussions on track.
There can also be cultural differences which affect the way in which decisions are made. For instance, a Japanese parent company may well have a different view on the pace of funding and an acceptable level of risk within an investment strategy to that of a US parent. Where a corporate restructure has taken place and a new owner becomes responsible for funding the scheme, these differences are something that the pension scheme trustees will need to acclimatise to quickly.
We have, however, seen many instances where the relationship between an overseas sponsor and the UK pension scheme works well, despite the additional challenges they face. So what are those schemes doing differently? Some observations are as follows:
Training: The relationship usually starts on a much more stable footing where a concerted effort is made to provide overseas company representatives with the information they need to understand the UK scheme structure, the responsibilities of the trustees and the main legislative issues.
Representation at meetings: A representative from the overseas parent/sponsor attending part of the trustee meeting from time to time has significant benefits and not only from the perspective of developing the relationship between the sponsor and the trustees. It also allows the company officers to observe the running of the trustee meeting, understand some of the issues that the trustees are grappling with and also gives an opportunity for them to provide a first hand insight into the strategy and performance of the sponsor.
A clear understanding of the company covenant and drivers: Where the trustees have an in-depth understanding of their sponsor’s covenant, the relationship between the companies in the group and the main factors which influence company and industry performance, discussions around funding are much more targeted and productive.
By putting covenant at the centre of funding and investment strategy proposals, trustees can give the sponsor a clearer idea of the framework within which decisions will be made, and the effect that their activities will have on the way in which trustees will seek to fund the scheme.
A clear planning and monitoring framework: An open discussion between the trustees and their sponsor at least once a year to agree funding goals, administrative targets, budgets and any other objectives for the trustee board makes a huge difference. This goal setting helps to ensure that all parties are clear as to what they are trying to achieve with the pension scheme each year, that they understand the issues which are likely to need to be resolved in order to do so, that the performance of the trustees and any strategy they implement can be objectively measured and that the trustees, in turn, understand what the Company likely to be able to withstand from a risk perspective.
Having an efficient monitoring process helps further – if there is a common set of funding related metrics which can be shared easily (preferably online) between the trustees, the company and any other relevant parties, the opportunities for miscommunication and misunderstanding are vastly reduced.
Succinct advice: And finally one for the advisors. We all, at some time or another, fall into the trap of using unnecessarily complex language, pensions jargon and producing very lengthy reports. Drafting clear, concise, easy to navigate documents is particularly important where they are likely to be read by someone who is not familiar with the vast number of pensions-related terms and acronyms which we have adopted over recent years, even more so if they don’t use English as their first language. From a trustee perspective, if your reports usually fall into the category of being written in pension-ese, it might be a good idea to ask your advisers to adapt their style of communication, to aid understanding and lessen irritation on the part of the overseas parent.
There is every chance that, with the right approach, UK trustees and overseas sponsors can enjoy a productive and collaborative approach to managing their schemes. It just requires a few procedural changes, consideration of the difficulties faced by the other party, and – on occasion - appropriate use of the ‘Mute’ button.