The purpose of this article is to highlight some of the key pensions issues you need to know about in relation to group reorganisations affecting UK companies. It’s not a substitute for legal advice, just to let you know where some of the bear traps can be – namely issues which may affect timing, cost, or even whether the reorganisation should be done at all.
Many thanks to Céline Hickey at Pure Pensions Legal for her input on this article.
The scenario we’re talking about here is some kind of group reorganisation affecting UK companies or entities. This may, for example involve:
- a transfer of shares in a subsidiary
- a transfer of assets
- a transfer of employees
- a distribution or return of capital
- making intra group loans
- a winding up or strike off.
Key questions to ask are as follows:
- Which legal entities are involved in the reorganisation?
And in relation to each legal entity:
- What is proposed to happen in relation to that entity?
- What pension schemes, if any, does that entity sponsor or participate in?
- Are any of those schemes “defined benefit” pensions schemes? (ones which promise members a defined level of benefit on death or retirement)
- For any defined benefit pensions schemes, what is the funding status of those schemes?
- Are there any defined benefit promises hidden within pension arrangements which appear to be defined contribution / money purchase schemes?
- What promises may have been made to employees and ex-employees in the past regarding pensions?
For obvious reasons, reorganisations which involve a transfer of employees are more likely to involve pensions issues than others. And defined benefit pension schemes generally raise more issues than defined contribution (money purchase) schemes).
Generally speaking, the pensions implications of a corporate transaction will depend on whether there is being a transfer of assets, or a transfer of shares. Where there is a transfer of shares, the pension scheme and all of its liabilities will automatically transfer to the buyer. Where there is an asset transfer, some or all of the employees will transfer to the buyer under TUPE (Transfer of Undertakings (Protection of Employment) Regulations). TUPE carves out an exemption for occupational pension benefits and provides that only certain employees are entitled to certain pension pension benefits from the buyer. However, two European cases have subsequently provided that additional pension liabilities may also transfer where they relate to early retirement and redundancy. These are known as Beckmann and Martin benefits (named after the cases).
“Employer debt” risk for underfunded defined benefit schemes
A key risk here is the potential triggering of an “employer debt” in relation to a defined benefit scheme which is in a funding deficit. This statutory debt can arise, for example if:
- the winding up of a defined benefit pension scheme is started; or
- the principal employer of a defined benefit scheme becomes insolvent; or
- an employer stops participating in a multi-employer defined benefit scheme (e.g. because it no longer employs anyone who is an active member of the scheme).
In any of those cases, the relevant employer may become responsible in law for paying any funding deficit in the scheme, or its share of the deficit as the case may be. Even for small schemes, this can be a very substantial amount.
A number of concessions may be available to avoid an employer debt being triggered. The key thing is to take legal advice on the proposals before implementing the reorganisation, or communicating the proposals with the scheme trustees or with any third parties.
Risk of a “contribution notice” or a “financial support direction” being issued by the Pensions Regulator
Again, this risk can arise if the reorganisation involves entities which participate in a defined benefit scheme which is in deficit.
There are some circumstances which can trigger a requirement for employers and pensions trustees to notify the Pensions Regulator – for example, a decision to cease trading in the UK. These are known as “notifiable events”. Depending on the situation, the Regulator may issue:
- A “contribution notice” (requiring the payment of a sum of money into the scheme); or
- A “financial support directive” (requiring some other financial support to be put in place to maintain the solvency of the scheme).
It is essential to take advice on these issues, and whether it would be prudent to apply to the Pensions Regulator for advance Clearance.
Impact on Automatic Enrolment
As from 1 October 2012, UK employers are required to automatically enrol certain eligible workers into a pension scheme, and to pay a minimum level of contributions to that scheme – currently 1% of basic pay. These duties apply to a UK employer once it has passed its “staging date” assigned to it by the Pensions Regulator. The staging date for any given employer depends on the number of workers in its PAYE scheme on 1 April 2012. The staging timetable started on 1 October 2012 and runs until 1 February 2018.
Based on the current law relating to transfers of employees, certain employees may be entitled to more generous pension contributions from their new employer following the transfer – including matching the employees’ contributions up to 6% of basic pay.
So what was previously a requirement on the transferring employer to pay 1% of basic may become an obligation on the transferee to match contributions up to 6%.
The Department for Work and Pensions is currently consulting on amendments to address this issue.
Obligations of participating employers towards pensions trustees
In relation to any given pension scheme, the legal obligations of employers towards the pension trustees will come from a number of sources including:
- Legislation (as well as guidance from the Pensions Regulator).
- The scheme documents (such as the trust deed and scheme rules).
- Any side agreements which have been entered into with the scheme trustees, for example in relation to funding issues.
For example, a scheme employer has a general statutory obligation to disclose certain information to the pension scheme’s trustees. This includes information on “…any event relating to the employer which there is reasonable cause to believe will be of material significance in the exercise by the trustees or managers or professional advisers of any of their functions.”
In addition, a particular reorganisation may require the trustees’ consent under the scheme’s trust documents. This may be the case, for example, if the transferee needs to be admitted a new participating employer into the pension scheme.
These legal obligations mean that the group needs to adopt a considered strategy as to how the communication with the pensions trustees should to be managed.
Communications with employees
Sometimes, a group reorganisation may involve proposals to change the type or value of pension benefits provided by a group company. In that case, the group companies will need specific advice on their obligation to consult with employees.
Where employees are being transferred, they will generally need to consent to any deduction from their salary to make employee pension contributions. Without this consent, the deduction may be treated as unauthorised deduction under the Employment Rights Act 1996.