British Vita Unlimited –v- British Pension Fund Trustees Ltd and another [2007] EWHC 953 (Ch) is the first case where the scheme specific funding regime (the “SSF Regime”) under the Pensions Act 2004 has been considered by a Court.

British Vita Plc was acquired in a leveraged transaction in 2005 and was subsequently re-registered as an unlimited company, British Vita Unlimited (“BV”). BV and a number of other group companies participated in two defined benefit pension schemes. Under the rules of the schemes the trustees could, following actuarial advice, determine the amount of contributions to be made by participating employers.

Prior to the acquisition the schemes were adequately funded on the basis of ‘middle of the road’ actuarial assessments. Other than the acquisition itself, there were no new material changes to the scheme funding. The trustees considered that the highly leveraged nature of the acquisition weakened the financial covenant of the participating employers and used their powers to demand almost £50m. This figure was arrived at using more conservative actuarial assessments of the schemes’ funding requirements, in particular assuming that all investments were to be in gilts. The demand was also made against BV as the participating employer with the greatest resources and was not apportioned amongst all employers.

The SSF Regime replaced the old minimum funding requirement and provides that in most cases trustees and employers must agree on the contributions to be made with the Pensions Regulator having the power to intervene and impose a schedule of contributions if agreement cannot be reached. There are a number of transitional arrangements dealing with the change from MFR to the SSF Regime and BV challenged the demands of the trustees on a number of grounds including (i) that the SSF regime had overridden the powers of the trustees under the scheme rules (so that contributions had to be agreed by BV or the Pensions Regulator had to intervene) and (ii) that the scheme did not allow the trustees to make demand on BV only.

The judge found in favour of the trustees holding that the contribution demands did not have to be agreed and the trustees could make demand on the employer they considered to have the best ability to pay. There is an appeal by BV so there may be further developments.

This case highlights the influence that pension fund trustees exert in relation to leveraged acquisitions (or other financings) where there is a defined benefit scheme. Furthermore, the Pensions Regulator has confirmed in a recent release that in leveraged acquisitions a conservative actuarial assessment of the adequacy of contributions might be appropriate. Very real examples of pension fund trustees punching their weight can be seen in recent press articles relating to Alliance Boots and Sainsburys. In the KKR backed Alliance Boots transaction it has been reported that the trustees have secured contributions in excess of £400m spread over 10 years. In confirming that it was not proceeding with its takeover offer for Sainsburys, Delta Two stated that one of the factors in deciding not to proceed was ”the arrangements for the future funding of the Sainsbury pension schemes necessary to gain the backing of the Sainsbury pension trustees for any offer by Delta Two”.

All this stresses the importance for purchasers and their financial backers to engage with trustees at the earliest opportunity to ensure that any contributions that will need to be made are factored into the funding model.