First use of moral hazard powers by Pensions Regulator
18 June 2007
Companies looking toward M&A must move pensions issues up agenda, lawyers warn
Today, for the first time since The Pensions Regulator was established, it has invoked its moral hazard powers - by issuing a financial support direction on Sea Containers Limited. The move ends years of uncertainty as to whether The Pensions Regulator would exercise its corporate veil breaking powers to impose personal liabilities on other companies in an employer's group.
Today's direction means that Sea Containers Limited must provide financial support to the two pension schemes of its London-based UK subsidiary Sea Containers Services Ltd. More details are awaited but such a direction typically involves the parent company putting in place a guarantee in relation to its subsidiaries' pensions liabilities or making every company in the group jointly liable for them.
"Since the Pensions Regulator was established under the Pensions Act 2004, the risk of it taking action has always been a consideration on transactions - but lack of overt action had diminished the perceived level of threat," says Adam Bushby, a pensions partner at business law firm LG.
According to Bushby, the Pensions Regulator's actions today highlight the need for pensions issues to be high on the agenda for parties to consider on transactions. He adds that this is against a backdrop of The Pension Regulator's own research which shows that too many employers are relying on the same advisers as their trustees on pensions matters. "This is particularly inappropriate in circumstances where there is a substantial pension deficit and the potential for M&A activity," he says.
"The fact that The Pensions Regulator has taken decisive action – together with the court action which the trustees of the Boots Pension Scheme are reported to be taking in relation KKR's bid - must both serve to encourage trustees to take a more active role in any corporate negotiations for the sale of a company," adds Adam Bushby.
The Pensions Regulator is also in the process of reviewing its guidance to parties involved in corporate transactions and is looking for comments on this. The guidance is currently some 41 pages long. "Making this guidance more accessible may lead to greater trustee involvement in transactions," says Adam Bushby. "It should also benefit members of pension schemes, provided companies are left with sufficient capital to enable them to thrive rather than just survive.
Notes to editors
- LG's eight-strong pensions team is highly experienced in advising both employers and trustees on pensions law. It also specialises in advising insurance companies and acts for numerous IFAs.
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Adam Bushby
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