PRINT THIS PAGE Pension schemes in the UK10/04/2008. Source: SJ Berwin. Wyn Derbyshire 
The defined benefit pension scheme - where employers effectively guarantee a certain future benefit for employees - is becoming increasingly hard to manage in Britain. The Pensions Regulator, established in April 2005, was put in place to protect the beneficiaries of such schemes, and its rules were seen as a threat to some private equity deals. It is true that the rules have strengthened the hands of pension fund trustees and put defined benefit schemes centre stage in many buyout negotiations. But a sensible clearance procedure - now, with revised guidance issued last month, moving further to a 'principles based' system - does at least mean that deals can be done without the threat of future regulatory action. So, even if the Regulator's powers have prevented some deals, the rules have not had the disastrous effect that some initially feared.
But the CBI, a leading UK business organisation, is worried that the combined impact of other changes in the UK will be to further damage the defined benefit (DB) scheme, and employers who operate them. The CBI says, in a paper issued last month, that the cost of defined benefit pension schemes has risen significantly – company contributions averaged 22% of salary in 2007, up from 16% in 2004. This, they say, has been driven by increasing longevity, lower investment returns and a rising tide of legislation over many years, as well as by levies that employers must pay to the Pensions Protection Fund (PPF). But recent proposals by the Accounting Standards Board (ASB), the Regulator and the PPF will, they argue, add substantially to employer costs, and should be resisted.
These changes could be important enough to impact the viability of DB schemes, and the returns on investments in companies that operate them. The ASB propose changes to the relevant financial reporting standard, FRS 17, which could increase balance sheet liabilities by up to 50%; the Regulator wants to recognise the impact of growing life expectancy in a way which the CBI says will affect 90% of schemes and increase funding costs by at least 10%; and the PPF levy will go up for some employers.
Funding a DB pension scheme in the current environment can be daunting enough, and M&A activity involving companies that operate such schemes is clearly harder - even though, in many cases, a change of ownership may be the best result for the pension scheme's beneficiaries. Rule changes and artificial assumptions which make the schemes even more unattractive are unlikely to help.
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. If you would like further information on its services to the private equity industry please contact Jonathan Blake or Simon Witney in its London office +44 (0)20 7533 2222 or visit the website at www.sjberwin.com.
|
