UK Pensions Bill

Intense lobbying from the British Venture Capital Association (BVCA) and city advisers has resulted in the government’s suspension of the controversial proposed changes to UK pension law. Baroness Hollis, the Minister for Work and Pensions in the House of Lords, told the Grand Committee on 8 July 2004, that the government now intends to re-examine these proposals. The lobbying from the BVCA and the host of lawyers and accountants is on the back of two of the recently proposed changes to UK pension law. These specific modifications to the pensions bill could prove damaging for M&A activity in general and, in particular, the private equity market.

The centre of such controversy stands with the rules that apply to the acquisition of a company with a group pension scheme. Usually, when an employer ceases participation in a multi-employer scheme (e.g. following the sale of the company), a mandatory funding check is required. At the time of the sale, should the pension scheme be under-funded, the company being sold is subsequently liable and therefore owes a debt to the pension scheme. Wyn Derbyshire at SJ Berwin outlined that ‘the principal catalyst for the changes was a concern on the part of the government that unscrupulous employers may seek to find a way to ‘foist’ their pension liabilities onto the forthcoming pension protection fund. Also, there was (and is) a general view that unscrupulous employers should not be allowed to evade their pension scheme obligations’.

Traditionally, occupational schemes are subject to a funding ‘test’ based on the minimum funding requirement (MFR) under the Pensions Act 1995. Under the terms of the newly proposed bill, the MFR is to be abolished and replaced by a scheme-specific funding requirement, whereby the buyout basis should be used when measuring any deficit and thus determines the total value of assumed liabilities. The new bill also outlines proposals to award a government appointed ‘regulator’ with the power to pursue directors and investors for contributions in the event of actual (or perceived) debt evasion, and there are plans to launch a pension protection fund to assist members of failed final salary pension schemes. Derbyshire commented that ‘the proposals of the government are too wide-ranging in scope, leaving open the possibility that ‘innocent’ parties may find themselves liable, or partially liable, for pension liabilities that are in reality no responsibility of theirs’.

David Pollard at Freshfields Bruckhaus Deringer outlined that where the new legislation is designed to give the appointed ‘regulator’ the power, there are still uncertainties as to which parties will be pursued by them: ‘It is up to the regulator to decide who is considered to be an associated party. As a private equity investor, it is difficult to state that you will not be caught up in this and brought to rights by the regulator. At present, we have no idea of the methodology behind the regulator’s decision to contact specific parties and exactly how far their reach will stretch. I think that ultimately there will be a lot of pressure on these ‘regulators’ to pursue shareholders and various other parties if a scheme goes wrong’.

The BVCA commented with conviction that such rules would, without doubt, discourage investment, and ‘could have a disastrous effect on the UK private equity market specifically’. The association and city advisers welcomed the move to suspend the proposed reforms, which has enhanced already heightened concerns over the rising number of pension deficits. As much as this news may prove detrimental in the case of a handful of specific deals, the broader consequence is that of a lower bidding price on the part of the private equity house once pension scheme liabilities have been taken into consideration. Derbyshire added: ‘some transactions will simply become uneconomic to pursue, with potentially damaging consequences for the economy and for jobs’.

Recent examples of such issues include WH Smith, Marks & Spencer (M&S) and MFI. Permira’s bid for the UK-based retailer WH Smith has faltered amidst news of the company’s under-funded pension scheme with deficits in the region of £215m and £250m. Last month, trustees of WH Smith’s pension fund announced intentions to block Permira’s proposed bid at 371p in cash per share, equating to a total value of £930m. Consequently, the private equity house has taken the atypical route of asking potential lenders to agree that all debts to the retailer’s pension scheme be paid off alongside their own claims in the event of insolvency.

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