ANDY GREEN
The creation of a new pensions regulator three years ago has given the trustees of corporate-sponsored pension schemes significant additional muscle in relation to their interactions with the sponsoring company. This shift in power has become particularly apparent in the way trustees handle corporate transactions.

The decisions reached by trustees can have significant implications not only on company cash flow and risk management, but also on how pension costs are disclosed in the company's financial statements.

Under new funding regulations, the pensions regulator will expect scheme trustees to investigate how quickly the company can make good any pensions deficit.

This may involve trustees instructing an independent review of the company's financial plans to form a view on the company's ability to pay.

Similarly, trustees should consider the strength of the company's financial covenant when determining how cautiously they need to reserve for meeting the pension scheme liabilities.

One of the most notable new powers, however, relates to the potential impact on corporate transactions. If the regulator believes that the security of members' benefits would be reduced as a result of a transaction, significant powers exist for it to secure financial redress from one or other of the corporate parties.

Advance clearance that these powers will not be used can be sought from the regulator. However, this requires the trustees' co-operation which may only be forthcoming in return for additional funding.

As a result of these changes, companies are becoming increasingly aware of the need to more actively manage their relationship with pension scheme trustees. In the past, many companies engaged the same professional advisers as their pension scheme trustees. It is increasingly common for separate organisations to be appointed to advise the two parties.

The major pensions' consultancies have responded to any accusation of a conflict of interest by creating "ethical walls" so that different consultants from the same firm can advise both the company and the trustees. For many companies and trustees, however, positive engagement and a greater degree of transparency may be the best solution.

The company's priorities in relation to the pension scheme funding and investment policy may differ from those of the trustees.

Companies need to understand how the advice that trustees are receiving will impact on the wider corporate agenda.

Moreover, corporate pensions issues can rarely be considered in isolation; corporate pensions actions can have a direct impact on other corporate disciplines such as accounting, tax and corporate finance.

Seeking advice on pension cost and risk management is essential for companies in the new regulatory environment and these changes have led a number of the major accountancy firms to expand their corporate pensions advisory capabilities in response.

As pension risk moves higher up the corporate agenda, companies are increasingly looking to actively manage their relationship with scheme trustees, as their new muscles are just starting to be flexed.

  • Andy Green is pensions partner for Deloitte in Scotland