New U.K pensions regulator affects U.S. corporate activity.

• Author: McKay, Neville

In April 2005, a new regulator--was established in the United Kingdom to oversee company sponsored pension plans. Should U.S. companies be concerned about this development? The answer is yes.

For years, the UK has applied a very light touch to the regulation of company pension plans. More than three decades after the establishment of the Pension Benefit Guarantee Commission in the United States, this has changed. Six months into the new regime, the consequences are being felt acutely in the UK transactions market. Now the ripples of UK pensions regulation are beginning to cross the oceans and widely affect company pension plans around the globe.

The problem stems from the cumulative changes made to protect UK employees and retirees during the last 25 years of the Twentieth Century. While corporations protested, there was no obvious pain because corporate UK had taken a big bet on the stock market--and been handsomely rewarded. As a consequence, several UK governments, prodded by the European Union, were able to push through changes now seen as burdensome upon UK industry.

The perfect storm of falling stock values, lower interest rates, and increased life expectancy resulted in large deficits in many UK pension plans--proportionately more damaging than the United States. The situation was made worse in 2003 when the UK government announced it was piercing the corporate veil in order to ensure groups stood behind the pension promises of their companies. As a result, the UK pensions regulator is insisting that, as long as underfunding persists, pension plan trustees act as unsecured creditors in negotiating funding with their sponsoring employers. What do these developments mean?

The regulator has identified three key areas where trustees should seek to intervene and maximize their funding at the expense of the sponsoring employer:

1. Change in priority

2. Change in control structure

3. Repayment of capital or subordinated debt

   For U.S. groups this has a number of implications. For example, the simple act of granting security over assets owned by a company sponsoring a pension plan will subordinate the position of the pension plan trustees. Such activity now requires consultation with the trustees, who are expected to negotiate improved funding terms in return for the reduction in their security.

   When businesses are bought or sold, the change in ownership will result in the pension trustees being in either a stronger or weaker position, depending...