Hundreds of mergers and acquisitions could be derailed by a proposal to force regulators to scrutinise deals that may threaten pension promises.
MPs on the work and pensions select committee lamented the sharp decline in the number of deals being vetted by the pensions regulator, saying the hands-off approach could be exploited by unscrupulous scheme sponsors.
In 2005-06, 263 proposed deals were forwarded to the regulator for clearance, but this number had dwindled to 52 by 2010-11 and nine in 2015-16.
MPs said that it was better for the regulator to examine and if necessary reject such deals head-on rather than take enforcement action afterwards.
“Some unscrupulous sponsors may well be calculating that they are better off risking a protracted anti-avoidance battle than coming to an immediate pension settlement,” the MPs said.
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However, they added that compulsory clearance should only be applied to a few deals “to prevent a disproportionate effect on normal economic activity.”
They suggested that all deals where the pension deficit was higher than a certain percentage of the transaction value could provide a threshold for investigation, but stopped short of putting a number on the percentage.
Deals need to be scrutinised to ensure that covenants are not weakened because of the differing identity and balance sheet of the new owner. An £850 million leveraged bid for WH Smith by Permira in 2004 was blocked by trustees because of worries that it would add to the risk of pensions not being paid.
Other proposals unveiled by the MPs today in order to prevent future BHS scandals include:
•Giving employers maximum breathing space of ten years to eliminate deficits except in exceptional circumstances. This could be a major blow to about 1,500 employers — a quarter of all defined benefit scheme sponsors — which have recovery plans of more than ten years. One in 20 schemes has a recovery plan of more than 18 years.
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The committee said that the regulator should never have allowed the 23-year recovery plan agreed between BHS and its trustees in 2012.
•Requiring speedier valuations of pension scheme assets and liabilities and forcing the most troubled schemes to undergo valuations more frequently than once every three years. The maximum time limit for agreeing recovery plans should be reduced from 15 months to nine.
•Giving trustees the power to water down the inflation-proofing of pension promises, especially in cases where the only alternative is company insolvency and the handing of the scheme to the industry lifeboat, the Pension Protection Fund. Changing indexation of benefits from the retail prices index to the, generally lower, consumer prices index was “certainly preferable” to company insolvency, the MPs said. Employers should be encouraged to revert to better inflation-proofing if their circumstances improved.
•Smaller schemes should be encouraged to merge with others and pool assets to bring down overheads, the MPs said. The government in its green paper next year should set out proposals to remove regulatory impediments.
•MPs also proposed an “aggregator fund” that could be set up under the auspices of the Pension Protection Fund, to help smaller schemes merge assets and liabilities.
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Mergers of schemes have been seen as near-impossible because of the differing covenants of the sponsoring employers. Even pooling administration or assets has proved difficult, although local authorities have been pressed by central government to combine some elements of their schemes.
•Asking the PPF to review its levy rules to ensure that smaller employers and mutuals were not being unfairly penalised. Under the current risk-based pricing system, employers pay contributions to the lifeboat scheme determined by their perceived risk of going bust. Some employers with unusual business models or a paucity of credit rating agency data might be disadvantaged.
•A system enabling employers to walk away from obligations while leaving members with better benefits than those on offer from the PPF should be streamlined. This has been used only rarely, partly because of the cumbersome way they were handled, but should be considered more frequently.