New criminal sanctions powers and employer resources tests flowing from the Pension Schemes Act have spooked the industry. Despite not being in force yet, is the new Act already changing how advisers and lenders approach corporate deals? 

 

The Pension Schemes Act caused controversy over some of the wording of the new anti-avoidance powers given to the Pensions Regulator, in particular the words "ought to have known” for criminal sanctions to apply against those involved with the scheme of an insolvent company. 

 

 

This is predicted to lead to more clearance applications, and even though the Act is not yet in force, it is already having an effect on the sector. 

 

Buyers are “proceeding with great caution”, when it comes to companies that have a defined benefit scheme, said Jeanette Holland, partner at law firm Baker McKenzie, although the regulations to implement the legislation are only being developed. 

 

"Over the next months, the secondary legislative framework governing the new powers is being developed and consulted on, as is the Pensions Regulator guidance, so it is only now that a clearer picture of the parameters of the powers is emerging,” said Holland.   

 

“However, despite several ministerial statements, given the very wide drafting of the new offences provisions, any transaction involving a defined benefit scheme will involve even greater due diligence and careful consideration of the potential impact on that scheme and on the financial covenant supporting it. Already we are seeing questions being asked in the lender market and hesitancy as to becoming involved, particularly if the scheme is of a significant size,” she said. 

 

 

The level of transaction activity is holding up at the moment, despite businesses being under pressure from the pandemic.  Holland said this is due to government support but the new TPR powers are already a factor as well. 

 

“Whilst it is widely anticipated that the criminal sanctions would not be successfully retrospectively applied, we are finding in practice that both company-side and trustee-side advisers are, to an extent, anticipating the new anti-avoidance framework, and that this affecting the approach being adopted in respect of transactions currently underway,” she noted. 

 

There is greater focus on documenting decisions and the reasons for them, as well as detailed exchanges of correspondence and information sharing between companies and trustees and even more rigorous covenant assessments of the impact of the transaction, according to Holland. 

 

 

Andy Palmer, who chairs the Employer Covenant Practitioners Association, said that the Pension Schemes Act could deter some investors where an employer has a DB scheme and is distressed, “but until the consultations on its provisions are complete it seems business as usual”, with M&A activity being driven by the availability of capital and opportunity.  

 

Buyers “continue to exercise caution where a target company has a DB scheme but aren’t being put off entirely”, he added, noting that it is usual to see a price reduction for a company with a DB scheme. 

 

The number of corporate insolvencies is currently low, he noted, reflecting the significant levels of government support in response to the pandemic, including an embargo on the making of winding-up orders, but “as government support is dialled down and companies have to repay emergency funding it is expected that rates of insolvency will increase”. 

 

 

The new Corporate Insolvency and Governance Act is also influencing the sector, with creditors no longer needing to be in agreement over the future of a company, which could, at least in theory, mean that trustees can be overruled. No such case has been tested in court yet, but Holland said a number of court applications have been made to clarify the provisions of the Act. 

  

Corporate activity has been suppressed not just thanks to government support schemes but also the uncertainty of the most recent lockdown, said Dan Mindel, a managing director at covenant specialists Lincoln Pensions. However, "the green shoots are there now and [the] second half of the year should be very active as the vaccine roll-out completes and confidence returns”, he predicted. 

 

The new insolvency law has had a slow start, he said, “but the new Restructuring Plan in particular is taking off in popularity as a way of getting consensus for plans as dissenting creditors can now be 'crammed-down'”, unlike in company voluntary arrangements.  

 

“We have not yet seen this for a company or group with a DB scheme, but it’s only a matter of time. We expect that this will be beneficial or neutral for the scheme and we don’t anticipate it being used to compromise schemes,” he added.