UK pension watchdog urges tough trustee negotiation

By Laurence Fletcher

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.