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Corporate transactions and the key considerations for trustees

The significant increase in deal-making activity seen both in the UK and globally, coupled with the introduction of the Pension Schemes Act 2021 (PSA 2021) has meant trustees are increasingly having to manage the impact of fast-paced corporate events on the pension scheme.

Corporate activity levels to remain robust

Despite macroeconomic concerns around inflationary pressures and the likely further rise in interest rates, it is expected that levels of corporate activity will remain robust during 2022, with corporates taking advantage of the still relatively low cost of debt and strong equity valuations. We expect this to be supported by the deployment of record levels of private equity ‘dry powder’ (noting that the level of undeployed capital rose to an all-time high in 2021).    

In response to the COVID-19 pandemic, we have seen many listed sponsors more closely examine their operations and options to increase shareholder value. For some this may be via mergers and acquisitions (M&A) activity (e.g. to address any structural or operational weaknesses), while in other scenarios near-term shareholder value propositions are being achieved via the disposal of non-core operations.

The impact of PSA 2021 on corporate activity

While the PSA 2021 and The Pensions Regulator’s (TPR) increased powers has put a spotlight on the impact of corporate activity on pension schemes, it has not acted as a barrier to increased deal-making activity. Instead, we are increasingly seeing deal-keen sponsors (and their advisors) engaging with pension scheme trustees earlier in the process to facilitate corporate transactions.

This includes sponsors proactively proposing mitigation packages to trustees, many of which are now including a wide-range of bespoke features, including a combination of one-off cash payments, contingent asset structures and enhanced security arrangements (e.g. extended parent company guarantees). Transactions are also providing great opportunities for trustees to formalise longer-term journey plans.

Encouragingly the PSA 2021 is driving more engagement between sponsors and trustees in respect of ‘business as usual’ activities and how they might impact covenant e.g. changes in intercompany arrangements such as licensing fees.

What are the key considerations for trustees?

In light of the PSA 2021, it is important for trustees to evaluate the covenant impact of corporate activity more proactively, to ensure that they are able meet regulatory obligations and help facilitate an outcome that benefits all stakeholders, and avoid being presented with a fait accompli. In some cases, more proactive sponsors may change the dynamics of engagement.  For example, we are seeing more scenarios where trustees are asked to critique advice produced for the sponsor rather than obtain their own standalone advice on the impact of a transaction on the covenant.

Having appropriate measures in place ahead of any potential corporate activity can help keep trustees on the front foot. Enhanced covenant information sharing protocols can help ensure sponsors consider the potential impact of a corporate event at an early stage in the transaction timeline. Such agreements should help to limit potential barriers to corporate activity and facilitate a positive outcome for the pension scheme. They should also be mutually beneficial for sponsor directors given the additional notification requirements introduced by PSA 2021.

Depending on the materiality of a transaction and its impact on the pension scheme, primary consideration should be given by both trustees and sponsors to TPR’s increased powers. The two new Contribution Notice Tests (the employer insolvency and the employer resources test) introduced by PSA 2021 should help guide trustees and sponsors to understand if regulatory involvement may present a potential barrier to corporate activity, including whether it would be reasonable for TPR to seek to use its powers. 

What else should trustees be considering?

Trustees should also consider other potential obstacles to corporate activity. Typically, these could include the potential triggering of a section 75 debt and/or impacts on trustee powers under a scheme’s trust deed and rules e.g. wind-up powers.

Often such barriers can be unlocked through innovative mitigation packages and suggested changes in transaction structures to benefit the pension scheme.

How can we help?

Our corporate finance expertise means we understand the objectives of each stakeholder, which is key to delivering a successful outcome for trustees.

Our client teams are also able to leverage our regulatory and restructuring capabilities to ensure we can give the best advice to trustees on the practical implications of corporate activity. Find out more.

Please get in touch with us to discuss how we can help you.