UK pension watchdog urges tough trustee negotiation

LONDON (Reuters) - Pension scheme trustees should consider asking for larger upfront payments to help safeguard assets when faced with highly-leveraged merger and acquisition deals, Britain's Pensions Regulator said on Thursday.

In a note ahead of a more detailed update this summer, the watchdog said firms should consider applying for regulatory clearance when corporate action significantly weakens an employer's covenant with its pension scheme, whether or not the scheme has a large deficit.

Such action could include a highly leveraged buyout or when a firm spins off certain assets, the regulator said.

A deal that has regulatory clearance means a firm can be sure it will not be found later to have breached rules about pension obligations and that the regulator will not force it to pay into or take responsibility for a scheme.

The note also said trustees should consider asking for 'materially enhanced' upfront payments, above the level of pension deficits as under accounting rules FRS 17 or IAS 19.

"The market is seeing record levels of M&A activity -- a number of these involving a high degree of leverage. We wanted to clarify these issues for trustees," a spokeswoman for the Pensions Regulator said.

The note from the watchdog, set up to make companies shoulder pension obligations, comes at a time when leveraged buyouts or other M&A deals, and the potential knock-on effects on retirement schemes, are getting more headlines.

Last month Alliance Boots agreed to an 11.1 billion-pound takeover, Europe's biggest leveraged buyout, by private equity firm Kohlberg Kravis Roberts and its deputy chairman and biggest shareholder Stefano Pessina, although talks with the pension fund trustees are ongoing.

A bid by CVC Capital Partners for supermarket group J. Sainsbury collapsed partly because it failed to reach an agreement with Sainsbury's pension trustees.

TOUGHER WORDS

"This is a significant toughening of the regulator's position. It effectively means defined benefit pension issues need to be considered irrespective of whether the scheme appears to be in deficit or not," John Broome Saunders, actuarial director at BDO Stoy Hayward Investment Management, said.

"This shifting of the goalposts may well be motivated by the regulator's desire to dip its hand further into the apparently deep pockets of the private equity houses, for the benefit of scheme members."

However, leading pensions consultant John Ralfe said the note was merely a reminder to pension scheme trustees of what they already know.

"This might change the mood music and it reminds trustees of the need to negotiate very seriously ... But it doesn't alter the minimum amount a hard-nosed LBO (purchaser) could get away with," he told Reuters.

In January's takeover of steelmaker Corus by Tata Steel, the Indian firm offered to pay upfront the deficit on the Corus Engineering Steels Pension Scheme and to increase the contribution rate on the British Steel Pension Scheme.