UNDERFUNDED pension schemes have hit the headlines for many reasons in recent years, but they had never been seen as a threat to mergers and acquisitions.

That was until last week when WH Smith suspended talks with Permira, the private-equity group, after it attempted to slash its £940m offer for the high-street chain.

The move was in response to demands by WH Smith’s pension-fund trustees that it plug at least part of the £200m hole in its pension fund. Now the whole deal may be in doubt.

This was not the first time that a large pension deficit had frightened off a suitor, but industry sources said the deal may have been scuppered by new government rules so draconian that they pose a threat to Britain’s fragile recovery in corporate finance.

It all started a world away from retailing — in steel. Allied Steel and Wire went bust in 2002 and 60,000 workers lost their pension funds when their underfunded occupational scheme was wound up.

There was a great deal of campaigning on the matter, and the government unveiled its response — a pensions bill designed to create the Pension Protection Fund, which would bail out schemes that could not pay employees the money they were entitled to. It would be funded by a levy on companies.

This was laudable enough, but in April, the pensions minister announced some amendments to the bill that were intended to stop employers avoiding their obligations.

The idea was to deal with the risks of “moral hazard” — in other words unscrupulous employers who might sell their business or restructure their company to avoid their pension liabilities and instead rely on the Pension Protection Fund to bail out their staff.

Two amendments were tabled. The first allowed the new pensions regulator to force companies that tried to dodge their pension obligations to pay a contribution into the scheme. The second gave the regulator the power to make solvent parent companies pay up where a restructuring has left a subsidiary with pension obligations it cannot meet.

Furthermore, it was proposed that these rules would apply to all actions taken after June 11, 2003.

Popular concern over pensions is well founded. Robert Maxwell looted the Mirror Group pension scheme. In the weeks after his death in 1991, it was found that he had plundered some £450m to prop up his ailing business.

On a different scale but nevertheless fanning the flames of popular discontent was the carmaker MG Rover, which last year hit the headlines when it was revealed to have an apparent £73m pensions deficit while a £13m trust fund had been set up for the company directors. They were forced to defend themselves in front of the trade and industry select committee.

Nobody would argue that there should be some protection for workers’ pensions, but the wording of the two amendments is so vague that virtually anyone connected with owning a company — shareholders, directors, private-equity investors as well as their immediate families — could be held responsible for filling black holes in pension funds. And the rules would be retrospective.