How to guide your pension fund through M&A activity

Buyers will usually aim to make an acquisition stronger and more profitable over time. Management’s objective is to deliver shareholder value, but that should mean increasing business value for the benefit of its creditors too – like its defined benefit pension scheme that ranks ahead of equity.

Trustees should be mindful that the scheme’s position may ultimately be improved by a deal

There are several actions trustees can take to be best prepared when their sponsor tells them there is M&A activity afoot.

Monitor the employer covenant

Even if M&A activity is not on the cards, trustees should have some form of covenant monitoring in place to keep abreast of the sponsor’s performance between valuations.

Through this dialogue trustees can make the employer aware of what corporate activity that needs to be flagged, and highlight the benefits of early engagement with the scheme.

When notified or aware of a potential transaction, this is the trustees’ opportunity to understand what might happen and collect relevant information on how the scheme and covenant might change.

What is expected to happen? Is it the sale of the employer group to new owners? Or the sale of one employer sponsor to a multi-employer scheme?

How will the scheme be positioned post-sale?

Consider what kind of buyers are being approached if it is a complete change of ownership. These could be other trade players or financial buyers like private equity houses or venture capitalists, for example.

If only certain employers are being sold, it is important to try and see how the scheme is going to be positioned post-sale. Will the liabilities be apportioned to the other employers so that the entity can be sold scheme-free?

Furthermore, are the buyer’s plans for the business post-acquisition known, and will the transaction structure increase debt/leverage and financial risk on the sponsor or wider group?

Try to find out the anticipated transaction timetable so it can be considered in the context of managing the scheme – such as whether it is going to clash with a valuation – and what, if any, input is likely to be required from them.

Maintain a dialogue

As the transaction develops, trustees will need to maintain a dialogue to understand progress and be able to react in a timely manner if needed.

Relevant steps to be properly prepared might include ensuring appropriate advisers are engaged – covenant input is likely to be key, for example.

It may also be necessary to revisit conflicts, to find out whether there is a requirement for new conflict management procedures. Sometimes, key transaction decision makers for the employer are also key contributors to the trustee board.

Other relevant steps might also include agreeing information requirements, adviser work and project timetables, as well as agreeing the requirement for and formalising a transaction sub-committee if necessary. Considering member communications is also key.

Moreover, trustees should communicate with the Pensions Regulator if necessary – if a transaction is likely to make it difficult to meet the 15-month submission deadline, for example.

Once the final form of the transaction is known, trustees can finalise the understanding of how the employer covenant and scheme will change – as part of a complete pre and post-transaction analysis.

They can also consider negotiating for appropriate mitigation if there is detriment to the covenant.

In summary, transactions generally mean uncertainty, which is never ideal. However, trustees should be mindful that the scheme’s position may ultimately be improved by a deal.

Trustees will need to be well prepared and advised. They should also be fleet of foot to ensure the scheme does not get in the way of a potentially beneficial M&A process.

Maintaining a dialogue with the employer to get the best possible information flow, and taking appropriate advice along the way will help trustees know when there may be potential detriment to the covenant, and when there should be negotiating for mitigation to protect members. 

If there is significant concern about the transaction, trustees will need good quality advice to act assertively and may consider discussing it with the regulator.

Josiah Harris is a trustee representative at Dalriada Trustees