pensions

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The UK government has signalled the importance of introducing a permanent superfund regulatory regime.

By Victoria Sander

After the excitement around Clara-Pensions’ approval as a “superfund”, or pension consolidator, in late 2021, the market generally expected that other pension superfund structures would soon follow suit. Last year’s mini-budget and the ensuing liability-driven investment (LDI) crisis, which triggered intervention by the Bank of England, no doubt weighed negatively on the development of the pension consolidation market, along with an increased focus on investment strategies for pension schemes generally. The expected pipeline of further approvals failed to deliver new participants in a market which was to provide much-needed de-risking capacity alongside the burgeoning and highly successful insurance bulk annuity transfer market.

Hopes were revived by the Chancellor’s Mansion House speech on 10 July 2023, which commented on the fragmentation of the defined benefit (DB) pension scheme landscape in the UK and the importance of introducing a permanent superfund regulatory regime, presenting a key policy direction by the government.

On 10 August 2023, the Pensions Regulator (TPR) announced revised guidelines for pension superfunds. The original guidance, issued in 2020, established an interim regime for superfunds and set out tests for when a pension scheme would be appropriate to transition to a superfund.

This blog post examines the updated pension superfund guidance and provides a high level overview of the key changes.

By Catherine Drinnan and Shaun Thompson

Click for larger image.

This year has seen a significant number of business failures, particularly on the high street, as businesses have struggled in the face of market fragility and Brexit uncertainty. When a UK portfolio company is underperforming, the presence of a defined benefit pension (DB) plan with a large deficit can be a significant problem. Companies with large pension deficits require contributions that affect cash flow and make exiting more difficult when the time comes to sell.

If a business slips into distressed territory, however, there are mechanisms whereby a company can divest itself of a DB scheme. As companies respond to Brexit and challenging conditions in some sectors, we believe that 2019 will see more of these types of arrangements. In our view, PE deal teams should consider how to respond if portfolio companies are at risk. While the mechanisms can be effective in allowing a company to continue trading (in some form), PE owners should note a number of important factors before deciding to attempt this.

By Catherine Drinnan, Shaun Thompson, Richard Butterwick, Terry Charalambous, and Catherine Campbell

This year has seen a significant number of business failures, particularly on the high street, as businesses have struggled in the face of market fragility and Brexit uncertainty. When a UK company is underperforming, the presence of a defined benefit pension (DB) plan with a large deficit can be a significant problem. Companies with large pension deficits require contributions that affect cash flow and make exiting more difficult when the time comes to sell.

If a business slips into distressed territory, however, there are mechanisms whereby a company can divest itself of a DB scheme. As companies respond to Brexit and challenging conditions in some sectors, we believe that 2019 will see more of these types of arrangements. In our view, corporates and M&A deal teams should consider how to respond if companies are at risk. While the mechanisms can be effective in allowing a company to continue trading (in some form), corporates should note a number of important factors before deciding to attempt this.

By Paul Davies and Michael Green

Commercial risks to businesses can no longer be neatly divided into financial and non-financial considerations. For example, there is growing recognition, particularly in the pensions sector, that a failure to take account for environmental and social governance (ESG) risks (in particular, climate change risks) can result in adverse financial consequences. While a revised EU directive  will impose an obligation on pension fund managers to consider ESG issues, pension trustees may already be subject to potential legal liability if they ignore material financial risks resulting from climate change (traditionally considered only a moral or ethical concern) in investment portfolios, according to legal counsel.

By Paul Davies and Michael Green

A new pensions directive was passed by the European Parliament on 24 November securing 512 votes (only 77 votes against and 40 abstentions), requiring EU workplace pension funds to consider environmental, social and governance (ESG) issues. This is considered a ‘landmark’ moment for responsible investment.

The new pensions directive stipulates that:

  1. ESG criteria is to be considered in investment decisions and their practical implementation should be disclosed in regular reports.
  1. Pension funds have to include their ‘stranded asset‘ strategy as part of their risk management procedure.
  1. The integration of ESG considerations will not be considered as conflicting with fund managers’ fiduciary duties. Fund managers will not be exposed to legal liability for an alleged failure to act prudently by prioritising ESG factors over financial risk returns in their investment decisions.

By Catherine Drinnan and Shaun Thompson

The recent furore over the collapse of high street retailer BHS has caused fierce debate over whether companies, or their ultimate owners, are responsible for the upkeep of a pension plan. For private equity, the debate has important implications.

In the US, pensions have also been hitting the headlines. In March, two funds of American private equity firm Sun Capital were found to be liable for bankrupt portfolio company Scott Brass’ pensionPEViews July 2016 Pensions deficit. A court ruled that Sun’s funds were jointly responsible for Scott Brass’ pension plan, as they had been directly involved in managing the company.

The ruling considered the fact Sun Capital employees had been appointed in the majority of the director positions at Scott Brass. The ruling also considered the purpose of Sun’s funds, to sell on Scott Brass for a profit.