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The Pension Schemes Bill 2019–20 was first published on 16 October 2019. Following the dissolution of the 2017–2019 Parliament at the end of the 2019 session, the Bill was reintroduced into the House of Lords on 7 January 2020. After a delay due to a lack of parliamentary time the Bill completed its journey through Parliament and received Royal Assent on 11 February 2021. Oonagh Steel, Simon Thomas, Carl Bradshaw and Angus Simpson of Goodwin Proctor explain the main provisions of the Pension Schemes Act 2021 (the Act) and consider its impact on restructurings and corporate transactions.
The Act amends the provisions of the Pensions Act 2004 in order to introduce new liabilities in connection with deficient defined benefit pension schemes. These changes arose as a result of the joint investigation carried out by the Work and Pensions Committee and the Business, Innovation and Skills Committee into the collapse of BHS with a pension scheme deficit of £570m in 2016 and the more recent failure of Carillion with a pension deficit of £900m.
Defined benefit pension schemes are not as prevalent as they once were but they currently are estimated to account for £1.5trn of assets and 10.5 million scheme members. In total there are estimated to be 5,500 pension schemes within the scope of the Act.
The Act creates three new criminal offences, being:
In addition, the Pensions Regulator has been granted a range of new powers and sanctions regarding its ability to collate information from regulated schemes and employers and punish those who fail to comply with its notices and directions. The changes include additional reporting duties for employers, power to inspect premises, new fines for non-compliance with any provision of information requests and for knowingly or recklessly providing false or misleading information to the Pensions Regulator or to trustees or mangers.
The Act introduces two new grounds to enable the Pensions Regulator to issue a contribution notice under its moral hazard powers. The new grounds are:
• employer insolvency test - this is where there is a deficit in the scheme and, at the material time, the director’s act or failure to act has materially reduced the amount likely to be recovered by the pension scheme had there been an immediate insolvency. A statutory defence will be available where the director gave due consideration to the extent to which the act or failure to act might materially reduce the recovery, and, if they considered this might occur, took all reasonable steps to eliminate or minimise the potential for the act or failure to act to have such an effect
• employer resources test - this ground will be met if the Pensions Regulator takes the view that the act or failure to act reduced the value of the employer’s resources, and that the reduction was material relative to the amount of the estimated deficiency in the scheme. Again, a statutory defence will be available where the director gave due consideration to the extent to which the act or failure to act might reduce the value of the employer’s resources and, if they considered this might occur, took all reasonable steps to eliminate or minimise the potential for the act or failure to act to have such an effect. The director will also have to prove that it was reasonable for them to conclude that the act or failure to act would not bring about a reduction in the value of the employer’s resources relative to the debt
Secondary legislation will prescribe the new notifiable events which must be reported to the Pensions Regulator for the purposes of the extended regime set out in the Act, but these are yet to be published. However, the consultation that preceded the Act suggested that the following new events would be notifiable events:
The reporting duty is broad enough to apply to other companies in an employer’s corporate group, directors and parties linked to the directors, which is more extensive than previously.
As set out above, liability for the new offences set out in the Act could potentially apply to third parties in addition to directors of the company and group companies—such as lenders, professional advisers and potential purchasers of the business. For example, a lender may provide finance to support a restructure of a company, knowing it to have a deficient defined benefit scheme, on the basis that such lending is secured by first ranking security. The new finance will, therefore, rank ahead of the pension scheme liability. If the restructure is not successful the lender will need to prove that it acted with reasonable excuse in order to avoid any criminal liability under the Act. There is an exemption for acts undertaken by an insolvency practitioner but this is unlikely to extend to advice given by the insolvency practitioner prior to his/her appointment (for example, in assisting a distressed group in considering and trying to implement a rescue). In response to concern regarding this wide scope of potentially liable parties the government stated that it did not want to create any loopholes by which parties could avoid liability.
The new criminal offences and regulatory sanctions will not have retrospective effect. In addition, the Pensions Regulator is expected to consult with the industry and subsequently issue guidance later this year as to how it will exercise its new powers.
The original intention of the Act was to deter wilful or reckless behaviour in relation to schemes and to improve the Pensions Regulator’s information gathering abilities. However, the scope of the offences set out in the Act appear to be far wider than originally anticipated.
The view of commentators is overwhelmingly that the scope of the new offences set out in the Act is too broad and will potentially apply to a wide range of stakeholders including lenders and professional advisers. The likely consequence of this may be that corporate transactions are delayed as a result of directors and other interested parties seeking assurances from the Pensions Regulator via the voluntary clearance regime. This will inevitably cause delay and could jeopardise a transaction. Furthermore, there is a risk that directors and third parties will be deterred from undertaking a rescue or sale of a company or group with a deficient defined benefit pension scheme.
It is believed that the new offences may disincentivise responsible directors and other stakeholders to pursue a turnaround plan or pension scheme compromise which would otherwise ultimately benefit the stakeholders of the business, including the beneficiaries of the pension scheme. It is feared that the directors may be minded to file for insolvency rather than risk personal criminal liability by continuing to trade while pursuing a rescue of the business with a deficient defined benefit pension scheme. If this comes to fruition it may undermine the UK’s rescue culture which, ultimately, would be value destructive for all creditors, including the members of the pension scheme.
The Act is also likely to impact other transactions outside of a rescue. M&A and other corporate transactions where the target group is sponsoring a deficient defined benefit scheme will also be impacted by the Act. Measures aimed at increasing the Pension Regulator’s oversight of such transactions will require persons involved to make a statement setting out information about the event and how any detriment to a defined benefit pension scheme, as a result of this event, is to be mitigated. Merely funding the pension to compensate for the effect of a transaction may not prevent the Pensions Regulator taking action and appropriate transaction structuring and/or Pensions Regulator clearances may need to be considered. This will likely require enhanced due diligence of the target’s pension arrangements to assess and mitigate the risk. The extended regime will likely see suitors engaging more proactively with trustees and the Pensions Regulator on transactions to obtain assurance around their proposed arrangements. This additional stakeholder engagement and complexity could reduce deal certainty and confidentiality, extend the transaction timetable and result in additional costs.
Post-investment, irrespective of any regulatory clearance received or new funding arrangements put in place on closing, the new owners will need to be mindful of ongoing Pensions Regulator reporting obligations and potential intervention by the Pensions Regulator when carrying out corporate actions involving distributions of value (including dividends, buy-backs, taking on new borrowing, granting security etc) from a portfolio company to shareholders and/or creditors in priority to the pension scheme. It will be important that an audit trail is maintained which includes all analysis and decision-making to establish that due regard was given to the impact of such corporate action on the group’s covenant strength with respect to the pension scheme.
The provisions of the Act are well intentioned to deter reckless behaviour and prevent the abandonment of pension schemes. However, those provisions have wide implications for the decisions of boards and may have the unfortunate consequence of preventing boards, their advisors and lenders from pursuing strategies which could lead to a better outcome for all creditors, including the beneficiaries of the pension scheme. While the option exists to seek clearance, this may not always be practical and it is uncertain whether capacity would exist to deal with matters in real time. Accordingly, the measures hold the prospect of worse outcomes for creditors as a result of filing for insolvency rather than risking the potential criminal liability of continuing to trade. The guidance is keenly awaited, including what amounts to a ‘reasonable excuse’, but it remains to be seen whether this will be sufficient to prevent the potentially value destructive consequences of the legislation.
Oonagh Steel is a senior associate in Goodwin’s Financial Restructuring practice and has over ten years of experience advising on a diverse range of corporate restructuring, insolvency and finance matters.
Simon Thomas is a partner in Goodwin’s Financial Restructuring practice and established the UK restructuring team in March 2019. Mr Thomas specialises in business rescue and corporate turnaround. He is an expert on all aspects of corporate restructuring, insolvency and finance.
Carl Bradshaw is a partner in Goodwin’s Private Equity group with a focus on mergers and acquisitions and other private capital investments. Mr Bradshaw advises investors, founders, management teams and portfolio companies on complex business transactions across the technology, healthcare and life sciences, consumer, real estate and services sectors throughout Europe.
Angus Simpson is an associate in Goodwin’s Business Law Department and a member of its Private Equity group. Mr Simpson advises on a broad range of corporate matters, with a focus on private equity and private M&A transactions.
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Anna joined the Restructuring and Insolvency team at Lexis®PSL in August 2013 from Berwin Leighton Paisner where she was a senior associate in the Restructuring Team.
Anna has worked on a number of large scale restructurings primarily in the UK market acting on behalf of lending institutions.
Recent transactions include the restructuring of a UK hotel chain and the administration sale of part of the Connaught group. Anna has also spent time on secondment at The Royal Bank of Scotland and trained at Clifford Chance qualifying in 2007.
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