National Grid sells gas transmission – how will the sale impact its pension fund?
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National Grid has announced it is selling its gas transmission network to an investor consortium, who also have an option to buy the 40% that remains with National Grid. The entity being sold sponsors Section B in the National Grid UK Pension Scheme. In other news, the scheme is outsourcing its administration next month.
National Grid first announced its intention to sell National Grid Gas Transmission in March last year. Last month, the firm revealed that Australian infrastructure specialist Macquarie Asset Management and British Columbia Investment Management Corporation, which invests on behalf of public sector schemes in Canada, will take a 60% equity stake in NGG.
Subject to regulatory clearance, National Grid expects that the transaction will be finalised in the second half of this year. The 40% minority equity interest that National Grid will retain in NGG could also be sold, as the parties have entered into an option agreement which can be exercised by the consortium between 1 January and 30 June 2023.
What will happen with Section B?
The potential sale of NGG will raise questions for the trustees of the £27.7bn National Grid scheme, as the scheme’s Section B is sponsored by NGG. The trustees said they have engaged with National Grid on the matter since the firm announced its intention to sell a majority stake in NGG a year ago.
“The Trustee has worked closely with the Trustee’s independent professional advisers to monitor and assess the situation in the context of fulfilling the Trustee’s duties and legal obligations, and to ensure Section B members’ benefits remain safe, secure and well-funded. The Trustees will communicate more with Section B members as the transaction progress and more information becomes available,” the scheme told members.
National Grid’s latest results showed a pension asset of £448m relating to Section B of the scheme as being held for sale, along with other assets relating to the gas transmission business.
The pension scheme currently has two sections – A and B – but was split into three sections in 2017 when National Grid sold its gas distribution business to Cadent Gas. When it sold the remaining stake two years later, Cadent agreed to set up its own defined benefit pension scheme, which took on the assets and liabilities of Section C in September 2020.
How does corporate activity affect a sponsor?
Corporate restructurings can pose a risk to a defined benefit pension scheme as they can affect who sponsors the scheme, as well as the financial stability of the entity that is sponsoring it.
The Department for Work and Pensions consulted on a new notifiable events regime in September and October last year, and it was expected that this would come into force in April this year, but a response to the consultation is still outstanding. Some now don’t expect the new rules to come into force until the autumn.
The two new notifiable events are:
- Where an employer has decided in principle to sell a material proportion of its business or assets, defined as 25% or more of the annual revenue of the business or of the gross value of the employer’s assets.
- Where an employer has decided in principle to grant security over 25% or more of its assets or revenue, putting the secured creditor above the pension scheme in the order of priority for debt recovery.
Law firm Squire Patton Boggs warned earlier this year that the new regime could disrupt corporate activity, and that the meaning of a decision ‘in principle’ as set out in the consultation was not clear.
For now, the regulations are not in force, but trustees still need to consider a number of things in transaction situations.
Jane Higgins, partner at law firm A&O, said trustees should consider how a deal affects the employer covenant. “Will the employers supporting the scheme be stronger or weaker after the transaction? Often, it’s difficult to know because it involves looking into the future. So the trustees will need information to help them understand any changes to the employer’s legal structure, asset base, future plans etc – and often professional advice to help them assess the impact,” she said.
Jane Higgins, partner at law firm A&O, said trustees should consider how a deal affects the employer covenant. “Will the employers supporting the scheme be stronger or weaker after the transaction? Often, it’s difficult to know because it involves looking into the future. So the trustees will need information to help them understand any changes to the employer’s legal structure, asset base, future plans etc – and often professional advice to help them assess the impact,” she said.
Higgins also advised meeting any new owners or investors in the employer, as this can be an important part of assessing the impact of changes.
“I expect the new notifiable events regime will help trustees get this information at an earlier stage,” she added.
Scheme outsources administration
As well as dealing with corporate activity, the trustees of the National Grid scheme have been busy rearranging the pensions administration.
Most of the staff of UK Pensions Operations, the scheme’s current pensions team, are being moved to Barnett Waddingham following a joint review by National Grid and the trustees. The changes take effect on 23 May as the team moves to the new outsourced administrator’s Guildford office.
The trustees said they “went through a robust and rigorous process” to appoint Barnett Waddingham.
