Seven things corporate lawyers should know about pensions

1 Why do pensions matter?

Defined benefit (DB) pension schemes provide staff with a pension based on their salary and service. DB schemes are therefore “balance of costs” arrangements, that need to be funded by the sponsoring employer, and are therefore a major creditor of the business.

2 Meet the industry stakeholders

The main stakeholders are (i) the Pensions Regulator (tPR) who is responsible for safeguarding scheme benefits and who has significant enforcement powers; and (ii) the Pensions Protection Fund (PPF) which is the industry “lifeboat” fund which picks up the pension liabilities of insolvent employers.

3 Key pensions due diligence issues

Scope of DD exercise will depend on whether the scheme is being acquired. Headline issues to check for the buyer

include the funding position of the scheme, the company’s cashflow commitment to the scheme, the extent to which the

Pension Scheme Trustees can influence the transaction, and how the pension scheme has been operated historically.

4 The Pensions Regulator – enforcement powers

tPR has robust “anti-avoidance” measures which it can issue requiring the recipient to put additional financial support in place for the scheme, in the form of a “contribution notice” or a “financial support direction”. tPR will look to do this where it believes that there is potential detriment to the pension scheme as a result of the transaction, or, because of some previous corporate event which has reduced asset coverage for the pension scheme in the business or the wider corporate group.

5 Options for structuring the deal

If there is a concern that tPR may have scope to issue pensions avoidance measures, then the parties to the deal can apply to tPR for clearance of the deal. There are also other corporate restructuring steps which parties to a transaction can take under which the purchaser does not acquire the scheme, but it is retained elsewhere in the seller’s group under what is known as a “debt apportionment arrangement”.

6 Pensions and TUPE

If the deal entails a business transfer rather than a share sale, strict pensions obligations apply under TUPE. In

particular, TUPE (and, if the matter involves any public sector pension arrangements, the Government’s Fair Deal

guidance) set out specific minimum levels of pensions that need to be provided by the new employer. Also, certain historic DB pension liabilities can transfer with the staff under TUPE, for which indemnity coverage should be sought.

7 Is there anything else to think about?

Yes. Even if there is no DB Scheme involved in the transaction, care should be taken to ensure that the company or companies concerned have complied with their pensions auto-enrolment rules – again, tPR is the body responsible for

enforcement and, depending on the size of the workforce, can issue penalty notices of up to £10,000 per day for non-compliance.