What is the pension risk in your corporate transaction?

29 Mar 2016

Whether you are buying or selling shares in a company, or a business and its assets, there is a pension risk in all transactions involving the movement of staff. The important thing to establish is what type of pension(s) is involved in your transaction.

The pension could be:-

  • Occupational pension scheme (which can be divided into final salary/defined benefit schemes; or money purchase/defined contribution schemes or hybrid schemes)
  • Personal pension
  • Group personal pension
  • SIPP (self invested personal pension)
  • SSAS (small self administered scheme)
  • Stakeholder pension
  • Qualifying scheme for auto enrolment

In both types of transactions it is important to undertake enquiries, known as due diligence, to find out as much information as you can from the seller about the pension arrangements.

In a share buyer purchase a buyer will inherit any pension schemes and compliance risks, so it is important to establish what schemes are in operation now and what schemes there were in the past. A buyer should consider whether it is willing to inherit the target company’s schemes as it may have obligations not only for current employees, but also obligations to provide benefits for former employees. This could also impact the buyer’s wider group, if there is one. It is unlikely a seller would agree to remain liable for former members/employees, but a buyer needs to be informed about the funding and liabilities of the pension scheme, and obtain copies of relevant documentation, in order to assess its risk.

A buyer would need to consider who the principal employer of the scheme is and who the current trustees of the scheme are, whether any changes need to be made, and the impact of those changes under the scheme, if any.

If relevant, buyers should request a copy of the actuarial valuation of the scheme, to assess what assumptions were used and any changes that have occurred since the last valuation which could affect it. This will show whether the scheme is in deficit. Funding will not be a concern for money purchase schemes, but the buyer will want to ensure the scheme has been set up properly, contributions have been paid, there are no outstanding claims and the scheme has been operated in accordance with its rules.

Since 01 October 2012 automatic enrolment began and will apply to all existing employers by February 2018 and new employers thereafter. Every employer will have new duties, including enrolling those employees who are eligible into a workplace pension scheme and contributing towards it. The commencement of the employers’ duties under automatic enrolment depends upon its staging date, and the date depends upon the size of the employer. A buyer should ensure the seller has followed its obligations, establish when its staging date was/is and whether it has complied with the legislation.

In a business and asset purchase what happens to the pension will largely depend on whether all the employees are being transferred across to the buyer pursuant to a TUPE transfer (Transfer of Undertakings (Protection of Employment) Regulations 2006) or whether some are being retained by the seller.

If it is the former then the seller will probably wish the pension scheme to pass to the buyer, but if it is the latter the seller may wish to retain control of the scheme after completion.

Once due diligence has been undertaken relevant assurances can be sought via warranties (i.e. promises given by the seller to the buyer) contained within the sale and purchase agreement. In a share sale the warranties may cover compliance or other specific pension information where assurances are needed. A breach of warranty would then permit the buyer to claim damages via a breach of contract claim. In a business and asset sale the warranties will normally ensure there is protection about the details which have been provided and against undisclosed pension liabilities. There will only be specific warranties concerning the operation of the pension scheme and funding if the buyer is assuming responsibility for the scheme following completion. Warranties are however subject to certain limitations and will not provide the buyer pound for pound recovery in relation to a specified risk. Therefore a higher level of protection, in the form of indemnities, can be requested for specific areas of concern which have been brought to the buyer’s attention.

If you think you may be affected by any of these matters, do get in touch with Trethowans Corporate and Commercial Team on 02380 321000.