Theresa gets tough on takeovers

Corporate transactions could face an additional roadblock, under Conservative plans unveiled in their 2017 manifesto.

Compulsory clearance?

At present, when a company is involved in a merger or acquisition involving a defined benefit pension scheme it has the option to seek clearance from the Pensions Regulator (TPR).  Clearance is a voluntary process which gives assurance that TPR will not use its powers in relation to that transaction.  Often, this involves some form of mitigation to protect members’ benefits.  However clearance applications have fallen in recent years, and the collapse of some household names has led the Conservative party to propose harsh action.

Under the proposals, TPR will be given powers to scrutinise corporate activity that 'threatens the solvency of the scheme'.  It could then clear the transaction, perhaps imposing additional conditions; or in some cases stop the transaction entirely.  This can only, unfortunately, reinforce a common view among finance directors that pension schemes are simply a burden to be borne or shed.  It could also have a knock-on effect of reducing corporate activity and forcing more companies to become insolvent.

News of this aspect leaked in advance of the recent pension schemes consultation closing.  The green paper looked at many contentious issues and notably avoided pre-judging the outcome.  It will be interesting to see the future government’s response, given Theresa May’s tough stance.

Further reading

Blog: Green Paper raises interesting questions but avoids setting a radical agenda


Fines for FDs?

Company directors will take on an additional risk, as the Conservative manifesto says TPR will be given powers to fine and disqualify them if they are found to have 'wilfully left a pension scheme under-resourced'. The Tories will also consider making it a criminal offence for a director to 'deliberately or recklessly put at risk the ability of a pension scheme to meet its obligations'. The potential for conflict with a director’s other duties would need to be managed carefully.

TPR doesn’t currently have the resources to undertake this level of analysis, and in the timescales required for corporate activity.  It’s likely that levies on defined benefit schemes would need to rise to pay for it.

Reform of reliefs?

There’s no mention of tax reform on pensions, however the manifesto will allow the Tories to drop their previous restrictive pledge to not raise income tax or national insurance (NI) – the troublesome condition which may have led to the U-turn on NI contributions for the self-employed at the Spring budget.  It’s entirely possible that the Treasury could now drop an even bigger bombshell.

While at the time of writing the bookies expect a Conservative majority, the odds are shortening and polls have been wrong before.  Labour also has takeovers in its sights, but has opted for a less prescriptive regime. Labour’s manifesto suggests a simple amendment to the Takeover Code requiring proposals to contain a clear plan to protect workers and their pensions.  This would place the onus on employers to get it right first time.

The Liberal Democrats have avoided this thorny issue but pledged to get stuck in on pensions tax reform.  Under a Lib Dem government, a review would consider introducing a single rate of tax relief on pensions, set at somewhere greater than basic rate relief of 20%.  Their manifesto suggests this could be simpler and fairer than the current system.

Much of the commentary around the election battlegrounds so far has focused on the state pension. However these proposals have the potential to have wide-ranging effects on corporate activity, and therefore the UK economy.