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The UK's Pension Rules07/11/2007. Source: SJ Berwin.
 When the UK created a Pensions Regulator in April 2005 and gave him extensive powers that were intended to prevent employers from avoiding liabilities under defined benefit pension schemes, many private equity firms were worried. The potential extent of the powers given to the Regulator was troubling, and there was a fear that the new rules could scupper some deals, notes SJ Berwin. Many predicted that pension fund trustees would become key players in negotiations.
That latter prediction has certainly come true: trustees do now play a more prominent role in M&A deals - the current bid for Sainsbury's, and current discussions at EMI, being particularly high profile examples. But the clearance procedure operated by the Regulator has gone a long way to calm the fears of private equity sponsors. It ensures that deals can be done (almost) without concern that the Regulator will subsequently require shortfalls in the pension fund to be made good by the employer, or people "connected or associated with" the employer.
Last month, the Regulator made some proposals for new guidance on the procedure and these are open for consultation until 2 November. Some practitioners have voiced concerns about the draft guidance, and there are indeed areas where improvements could be made and others which will embolden trustees further. But the move towards a "principles based" approach to clearance applications - which encourages employers and trustees to focus on the actual impact of an event on a (defined benefit) pension scheme, rather than simply relying on prescriptive rules - could actually be good news.
In his proposals, the Regulator emphasises that events for which clearance applications may be appropriate will always involve detriment to a pension scheme's ability to meet its liabilities. Where the detriment is material, measures to mitigate that detriment must be put in place to protect members. The principal consideration when considering whether steps are needed to mitigate a detriment will always be the financial strength of the sponsoring employer(s) of a pension scheme and other members of the employer's corporate group. However, if the trustees form the view that additional security is available they should consider trying to obtain the benefit of that additional security. An example of this would be through the use of contingent assets (assets on which a claim by the pension scheme exists on the occurrence of one or more specified future events).
Some commentators have expressed concern that the new proposals represent a "hardening" of the Regulator's attitude towards clearance applications. In practice, however, many of the new proposals are either already implicit in the current clearance guidance, or represent the approach already adopted by the Regulator's office to clearance applications. It seems unlikely that the proposals, if implemented, will make much difference to applications for clearance.
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. http://www.sjberwin.com/
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