New powers for UK pension watchdog hit dealmaking

New enforcement powers that let the UK pension watchdog seek jail terms if corporate activity damages a workplace retirement scheme have begun to affect dealmaking, according to pension advisers.

At least one deal that had reached an advanced stage has collapsed since the new criminal offences were introduced in October, according to a Financial Times survey of six of the largest pensions consultants that provide advice on mergers and acquisitions.

Potential buyers have also become warier of companies that have defined benefit (DB) schemes, where the employer is on the hook to fund pension commitments.

“I am aware of one good-sized deal — involving a DB scheme — that collapsed,” said John Harvey, partner with Aon, the actuarial consultancy firm. “The negotiations were advanced. The pension worry played a large role in the decision to withdraw from the deal.”

The findings provide the first insight into the impact of The Pensions Regulator’s new powers that are designed to offer better protection for pension scheme members. The watchdog can seek criminal sanctions, including jail terms and unlimited fines, against anyone engaging in activity that materially damages the funding of a DB pension scheme.

The penalties were brought in following a series of corporate pension scandals, including that of BHS, the former high street retailer, and Carillion, the outsourcing group, where the retirement savings of tens of thousands of members were put at risk due to underfunding of the schemes when these businesses collapsed.

Stephen Postill, senior director with Willis Towers Watson, said the new rules appeared to be particularly affecting private equity transactions, which typically are highly leveraged.

“There’s certainly an air of nervousness about deals,” said Postill. “It’s early days but I expect the new rules will make it harder for a business to sell if they have a substantial pension scheme,” he said, adding: “I would say these powers are a more of a deterrent for private equity deals.”

Charles Cowling, chief actuary with Mercer, said the new powers were slowing business activity because of the “additional conversations and legal advice” that were now required.

“The new higher bar has led to a fair amount of nervousness expressed by both trustees and employers about the potential for these new powers to give rise to fines and prosecution,” said Cowling. “It is slowing down the process because employers have to take much more care to ensure that [pension scheme] trustees are informed of any corporate activity that might have implications for the strength of the covenant.”

XPS Pensions said some companies looking for acquisitions now “do not want to go near” a business with a DB pension scheme, due to future regulatory risk. “I think inevitably we will see more companies pulling out of deals, or not proceeding with deals, where pensions are involved,” said Robert Wallace, a corporate adviser at XPS. “Even though the risk of a jail term may be small, it is not something that some buyers are willing to take on in a deal.”

The Pensions Regulator said: “We don’t intend to prosecute behaviour which we consider to be ordinary commercial activity. However, if someone is proposing to do something that would amount to a more serious example of intentional or reckless conduct putting members’ savings at risk, we will not hesitate to use the powers we have to protect members and the Pension Protection Fund.”

The British Private Equity & Venture Capital Association said its members took their “pension scheme responsibilities seriously” and its code of conduct made clear they were “all expected to work to the benefit of the companies they support”.

Additional reporting Kaye Wiggins