U.S. Acquisitions in the UK – Update on managing UK pension risks

An overview by Clive Weber, Pensions Partner at Wedlake Bell LLP, London

Following the well publicised problems of the British Homes Stores Pension Scheme, pension aspects of corporate transactions in the UK remain in the spotlight. This article explains the background as well as the current views of the UK Government and the UK’s Pensions Regulator.

Introduction
US owners or would be owners of UK companies should take extra care over a UK defined benefit pension scheme (“DB Scheme“), sometimes known as a ‘final salary’ scheme. How should US acquirers/owners (“US Acquirer“) manage the pension risk of UK DB Schemes?

General picture
Deficits in UK pension schemes have increased dramatically in recent years. Increased longevity, poor investment returns and the steep decline in UK gilt yields (greatly increasing pension liabilities) have all contributed to this. Under UK law the sponsoring employer is liable for the scheme’s deficit. In some cases this has placed a severe strain on the employer’s business and/or its total collapse. In this event scheme members will usually be entitled to receive compensation from the UK’s Pension Protection Fund but the compensation is often at levels considerably less than scheme benefits. 

The Halcrow pension scheme case
The case of the Halcrow pension scheme is an example of UK pension problems emerging for the US Acquirer.

In 2011 a USA global engineering company, based in Denver, Colorado (“Halcrow USA“) acquired the UK Halcrow engineering group (“Halcrow UK“). The only employer with direct legal responsibility for the UK Halcrow Pension Scheme under the scheme’s trust deed was Halcrow UK. Halcrow USA took care not to assume direct responsibility for the scheme. Winding the clock forward five years, the picture is very different. In July 2016 Halcrow USA and Halcrow UK reached a financial settlement with the UK Pensions Regulator (“UK Regulator“) and the UK’s Pension Protection Fund. Under the settlement Halcrow USA contributed an additional £80 million to the pension scheme and provided a £50 million guarantee.

The alternative was for Halcrow USA to withdraw its support for Halcrow UK. Because of the large deficit in the Halcrow pension scheme this would have led to Halcrow UK’s insolvency and the loss of its substantial UK business as well as job losses and reputational damage.

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