Tough regulation (and a tougher recession straining occupational schemes) has seen law firms scrambling to bolster the contentious side of their practices. Sebastian Cheek reports

Recent figures from legal recruitment firm GRS Legal revealed that in the first quarter of 2009 opportunities in pensions-based legal recruitment rose 19% compared with the same period the year before.

The figures showed that pensions teams in particular were actively expanding at mid and senior levels. The main driver behind this spike, says GRS Legal, was the increased demand placed on legal practices as a result of the need for pension schemes to deal with recessionary pressures in the market.

Speaking at GRS's legal recruitment seminar in April, group director of legal Fiona Gibb said: "Teams are being expanded to support the anticipated increase in work levels. Pensions law is benefiting from an increased workload as redundancies increase dramatically across the nation's workforce, creating massive changes to their pension arrangements."

GRS Legal pensions consultant Priya Thukral observes that the practice area has seen mixed fortunes of late. The transactional side has dipped as it is reliant on corporate transactions, which have dried up recently, while teams focused on the advisory side are still "ticking over quite nicely," says Thukral.

Changing focus

The last 18 months have brought about a new twist to the type of work pensions lawyers have been undertaking, says Freshfields Bruckhaus Deringer senior associate Charles Magoffin. Trustees have suddenly found themselves dealing with serious financial issues and acting as de facto creditors for a lot of UK companies.

The Pensions Regulator's statement to employers sponsoring defined benefit pension schemes, issued in February, echoes this. It states: "The position of trustees of a pension scheme in deficit is akin to unsecured creditors of the sponsor organisation. They normally have a shared interest in maintaining the health of the company, as sponsors are in a position to make up shortfalls and in the event of insolvency pension funds generally fall behind payments to secured creditors."

The fundamental shift has been a move from a boom environment of corporate and transactional activity to a scenario of crisis management. To this end defined benefit pension schemes have to confront difficult issues about the ability of their employers to meet ever growing liabilities.

For this reason, lawyers have seen an increase in activity such as working alongside accountancy firms during covenant reviews and concerns over funding levels.

Many schemes are, of course, less well funded than three years ago. "Employers face an equally difficult issue about meeting their obligations to fund schemes and how to balance that against the survival of the business and there is an increased need for legal advice and innovative solutions on both sides of the fence," says Magoffin.

Wragge & Co head of pensions, Glyn Ryland, adds that trustees are asking employers for more money and the employers are weaker than three years ago so it is a "perfect storm of problems".

"The advice people are looking for from lawyers is how to conduct the written negotiations to ensure the trustees have done a good job for the members and have got the best funding they can without causing more damage than necessary to the employer," he says.

Similarly, DLA Piper head of pensions David Wright says that with a greater need among schemes for investment advice he has seen an increase in demands from schemes to supervise the contracts they enter into when they engage investment managers.

According to lawyers then, activity in the pensions legal sector has seen a flourish, but IPS Financial Services Recruitment director Andrew Gartside believes the market has been very busy for as long as anyone remembers, particularly over the last two to three years.

"Activity levels have stayed fairly high despite the downturn everywhere else," says Gartside. "They have been affected to some degree by the fall-off in mergers and acquisitions work, but there has been no shortage of scheme advisory work as each tranche of pensions legislation kicks in and there is more to follow."

Regulatory measures
Indeed, a key factor in the changing role of pensions lawyers was the introduction of the Pensions Act 2004. This increased the powers of scheme trustees over the funding payable by employers, and brought in the power of The Pensions Regulator to impose liabilities on third parties connected with sponsoring employers.

"The Act made it impossible for employers to have sole control over how much they paid into their pension schemes over time," says Magoffin. "Before then trustees often had to accept whatever the employers decided was appropriate but the Act meant that at a minimum that amount would have to be agreed.

"The result was always going to be essentially a lot more funding for pension schemes and deficits managed in a more prudent manner.

"And with the regulator's powers relating to connected third parties, it is not the sponsoring employers but also investors in and lenders to companies which need advice on the risks they face. These powers have seen the interests of pension trustees being given much more weight in M&A and restructuring transactions than used to be the case."

The Pensions Regulator says the economic downturn has certainly been a major issue for its in-house lawyers.

In response to these issues it recently released two statements setting out their position on the funding of defined benefits schemes and the increased risks associated with the economic situation, especially fraud.

The former of the two statements – Statement to Employers Sponsoring DB Pension Schemes – says: "When the sponsor company is under pressure there is potential to renegotiate previously agreed plans to repair pension deficits (recovery plans). There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency. But the pension recovery plan should not suffer, for example, in order to enable companies to continue paying dividends to shareholders."

Lovells pensions partner Katie Banks agrees that with some companies facing trouble and refinancing and restructuring commonplace, the regulator's guidance has certainly served to highlight pension obligations.

"This is because the regulator expects trustees to keep an eye on what is happening to a company and whether it has an adverse affect on their pension scheme," she says. "Five years ago this would not have needed pensions advice."

Litigation
Given the economic climate, one might expect an increase in the amount of schemes looking to seek redress for poor investment advice. According to lawyers there have been whisperings in
the industry of a likely increase in litigation.

Most lawyers agree, however, that litigation, particularly in class actions, still remains the preserve of the US legal system. There has been a very slight increase in UK schemes getting involved in this area, but relatively little activity has meant no increase in legal recruitment to speak of.

"I have seen one client seek to do it [seek redress from poor investment advice] but I have not seen it generally," says Banks.

"Trustees have recognised they have taken on risk and are not trying to sue people for the poor performance of the stock market but where they have particularly felt they have been misled then they are doing things."

Nevertheless, GRS's Thukral says litigation has the potential to pick up in the coming months. "There are firms out there who are actively recruiting on the litigation side but certainly in the next 12-24 months I think there will be greater interest from firms on that side of things," she says.

Greater confidence in the market is reflected by the fact that GRS is aware of numerous leading pensions teams looking to make senior hires towards the end of this year.

Indeed, one aspect of the redress issue that has started to appear on some law firms' radars is investment consultants coming under scrutiny from pension schemes after recommending investment in so-called 'cash' funds that have not turned out to be very cash-like at all.
According to one industry source, consultants have recommended funds which invested not in cash but in asset-backed securities (ABSs) and mortgage-backed securities (MBSs). These funds effectively bought the right to receive a stream of money (from mortgage repayments). The cash stream was backed by security over the underlying houses which have been mortgaged. So, in good times, that income stream was literally 'as safe as houses', and it was very cash-like and reliable.

But in recent times, of course, house values are not stable. So the cash fund's investment in MBSs has dropped in value as people started to default on their mortgages. The cash fund then cannot repay the cash to the pension schemes.

Many of these cash funds were meant to be nearly as safe as a bank account with better returns. But they are not. The consultants who recommended them are subsequently coming under scrutiny and, although this does not seem to have manifested itself just yet, it could lead to an increased demand for legal representation in this area in the not so distant future.

Recruitment activity
So how actively have law firms been recruiting in recent months? Lovells has taken on one person and is looking to recruit another two in September; Wragges has taken on three people since Christmas, has two more arriving in the summer and is looking to take on three newly-qualifieds from its own ranks, also in September.

Similarly, DLA Piper has taken on three people in the last 12 months, is set to take another couple on in the near future and has promoted one person to partner and one to associate. Wright admits it has been an "active time" for DLA Piper's pensions team at a time when other areas are less busy.

Freshfields' Magoffin, meanwhile, says it has probably been more than a year since it brought in someone from outside, although the firm maintains a steady flow of new joiners at
junior levels.

Wragges' Ryland says: "Normally it is difficult to recruit pensions lawyers but at the moment we have a choice of very strong candidates, which is fantastic."
IPS's Gartside however, disagrees. "To say there has been a spike in recruitment is wrong, unless you are talking about the last few years rather than months," he says.

"My view is that the number of vacancies registered for pensions lawyers has fallen off since the turn of the year. I think recruitment of pensions lawyers among the law firms has been quieter, not because the work isn't there but because there has been a ban on recruitment due to the general backdrop of reduced corporate work, redundancies, consultation periods, falling revenues and so on."A combination of regulatory factors and the financial squeeze has considerably shaped the pensions legal landscape over the past four years. Although some recruitment companies and law firms have observed a specific increase in recruitment over the past 12 months, it seems that the pensions legal sector had been thriving for some years prior to this.

The recent surge seems to be particularly around the advisory work lawyers are undertaking, which Gartside believes has always been the 'bedrock' of pensions legal work.

Magoffin notes that in line with the changing backdrop, pensions lawyers have had to develop a whole set of new skills and a broader range of knowledge than before.

"We have found ourselves in a different environment where we are negotiating with, or representing, major creditors, managing liabilities and are having to be involved on restructuring and insolvency matters, which is relatively new for most of us, but keeps it stimulating and exciting."