The Pensions Regulator has had a busy lockdown. While some details of its new enforcement powers under the Pension Schemes Act 2021 remain to be finalised, the need to consider the implications of those changes when conducting a wide spectrum of corporate transactions is clear.
Merger and acquisition dealmakers, board members and others should be aware of the obligations – and the consequences of getting it wrong.
Much has already been said about the new criminal offences and civil penalties that could catch ‘normal’ corporate activity. But it is the increased notification requirements that could have the greatest practical impact for many M&A transactions.
These new requirements are not yet in force but acquisitive corporates would be well advised to plan ahead, particularly in view of the significantly increased sanctions for failing to notify.
What is changing?
The principal change to the ‘notifiable events’ regime is that employers will need to give advance written notification to both the regulator and the pension scheme trustee of material corporate transactions. Although certain aspects are still outstanding, the key points to note are that:
- it is not a one-off obligation – further notifications will be needed if a transaction materially changes or is cancelled (so a watching brief must be kept over deal terms);
- the implications of the transaction must be described – it is expected that the notification will need to state how the transaction will affect the scheme and what steps are being taken to mitigate those effects; and
- the timing of the notification remains to be confirmed but is likely to be significantly before signing.
The sale of a controlling interest in a sponsoring employer is already a notifiable event under the current rules.
However, two further notifiable events are expected to be added: first, selling a ‘material proportion’ of the business or assets of an employer with funding responsibility for at least 20 per cent of the scheme’s liabilities, and second, granting security in priority to the scheme.
What should sponsors do?
The government has not confirmed when these enhanced notification requirements will start to apply – realistically, not before the autumn or possibly next year. Interested parties should keep the following checklist to hand:
- Keep a watching brief on the notifications regime – as mentioned, a number of details remain to be confirmed. Ensure that someone is nominated to monitor guidance, including the nature of corporate transactions required to be notified and the timing of such notifications.
- Timing is everything – the timing of notifications may be the main challenge in a corporate deal context. If the regulator wants to know about the transaction significantly before signing, it may be difficult to pinpoint when in the process there is sufficient certainty to be able to provide the required information. During the consultation, there was talk of giving notice at the heads of terms stage, but this may not be a sufficiently well-defined concept to serve as a trigger for notification. The employer may also have concerns about confidentiality and commercial sensitivity. If contemplating a significant transaction in the fourth quarter of 2021 or beyond, it makes sense to factor additional time into the deal timetable.
- Protocols – it is vital that all stakeholders (particularly those who are less familiar with pensions matters or do not deal with trustees directly) are aware of the regulator’s requirements to avoid a transaction occurring without due regard for the obligations or being delayed. It would be sensible to develop a well-crafted protocol (with appropriate training). In preparing such a protocol, existing governance structures and policies should be reviewed or updated to ensure relevant transactions are considered by the right people at the right time.
- Paper trails – care should be taken to adequately document the decision-making process around corporate activities – recording formally that due consideration has been given to the transaction in light of the regulator’s policies, its impact on the scheme and the rationale for engaging (or not) with TPR in advance of that transaction.
If schemes do not comply with the changes in notification requirements, the new rules allow the regulator to impose far stiffer financial penalties (up to £1m) for a failure to notify.
Even more soberingly, TPR could pursue a criminal prosecution punishable by a custodial sentence for providing it with false or misleading information.
This post was originally published in Pensions Expert on June 19, 2021.