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Pensions PENSIONS ........................................................................................................................... TABLE OF CONTENTS WHAT IS A PENSION? .................................................................................................. TYPES OF PENSION SCHEM...

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Pensions in a Transactional Context

Pensions TABLE OF CONTENTS PENSIONS...........................................................................................................................2 WHAT IS A PENSION?..................................................................................................2 TYPES OF PENSION SCHEMES................................................................................2 OCCUPATIONAL PENSION SCHEMES.................................................................2 PERSONAL PENSION SCHEMES...........................................................................4 DUE DILIGENCE FOR PENSIONS.............................................................................4 EMPLOYERS’ OBLIGATIONS.....................................................................................5 PENSIONS TREATMENT IN ASSET SALES ...........................................................5 BUT PENSION PROTECTION REGULATIONS ....................................................6 ALSO CHECK AUTO-ENROLMENT........................................................................6 S.75 PENSIONS ACT LIABILITY................................................................................6 PENSIONS TREATMENT IN SHARE SALES ...........................................................6 OPTIONS FOR EMPLOYEES......................................................................................7 PENSION PROTECTION FUND, PENSIONS REGULATOR .................................7 PENSION PROTECTION FUND...............................................................................7 PENSIONS REGULATOR..........................................................................................7 EMPLOYEE’S PERSPECTIVE.....................................................................................8

Pensions in a Transactional Context PENSIONS WHAT IS A PENSION?

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A pension is a tax-efficient means of saving for retirement. Money that is paid into a pension scheme for the benefit of the employee is not taxed, unlike the employee’s salary. Contributions are generally made by both the employer and the employee The money contributed to the scheme is then invested, and the investment gains are added to the pot of assets that belong to the employee. Once the employee retires, they’re generally allowed to take up to 25% of what is in their pension pot as a tax free lump sum. The rest of the money is traditionally spend on buying one or more annuities. o An annuity is a contract between the employee and an annuity provider whereby the employee pays the remainder of the pension pot over to the annuity provider, in return for the provider guaranteeing a certain amount of income for the employee per year for the rest of the employee’s life. This may sometimes be linked to inflation as well. o The annual amount that the annuity provider is prepared to pay will depend on its prediction of how long the pension holder is likely to live for.

TYPES OF PENSION SCHEMES 

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Occupational pension scheme: a scheme that involves the relationship between the employer and its employee. o It will be the employer’s responsibility to pay the pension over to the employee on retirement. o The employer will appoint independent pension trustees to look after the money paid into the pension and to invest it appropriately. o Most will be either a money purchase scheme (defined contribution), or a final salary scheme (defined benefit). There is a new scheme called the collective purchase scheme, but these are only likely to be used by large corporate groups. o Can also be a single employer or multi-employer scheme (to cover all companies in a group) Personal pension scheme

OCCUPATIONAL PENSION SCHEMES  Key difference to DC/MP: the benefit to the employee is fixed. Defined This means that the level of contributions is unknown and may Benefit vary from year to year – can be very expensive for the employer. Scheme This is a red flag in due diligence to find. (AKA Final Salary  Provides a fixed % of employee’s final salary as a pension on Scheme) retirement  Employer required to pay balance of costs necessary to fund promised pension and guarantees a certain level will be paid on

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Defined Contributio n Scheme

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retirement Potentially very expensive and risky o The employer cannot predict the cost of the scheme o Depends on factors like how long employee will work for and thus final salary on retirement; whether employee is entitled to buy a better entitlement; the performance of the stock market and the return on the scheme’s investments; how much an annuity will cost at the time of retirement to provide the level of pension promised o Risk is borne by the provider of the scheme Final salary schemes are subject to more regulation in the form of funding rules coupled with employer debt and anti-avoidance provisions. Employer’s liability is fixed at level of contributions it agrees to make, employees make fixed contributions as % of salary (notionally separated) Called Money Purchase because the fixed point is how much is paid in contributions to the scheme during the life of the pension. Employer and employee will both pay in an agreed level of contributions into the pension fund. These contributions will make an investment return depending on how they are invested in the state of the markets. Contributions are invested by TR on employee’s behalf On retirement, money buys an annuity providing steady stream of income until death. The pension they receive will be whatever their pension pot can buy for them at that point. So, although there is certainty about what goes in, there will be no certainty about what the employee will receive. Preferred by employers

Money purchase scheme:  Key difference from DC is that a member will be entitled to the proceeds of a proportionate share of the collective scheme assets paid as a pension, rather than an individual pot of assets. The investment and longevity risk will therefore be borne amongst the whole membership of the scheme and not by individual members as in a MP or buy the employer company as in a DB scheme.  The pension may adjust up or down, including during the year of retirement, depending on the under or over funding of the scheme as a whole. This means that a member’s income in retirement will potentially fluctuate.

PERSONAL PENSION SCHEMES Persona

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Between employee and pension provider.

Pensions in a Transactional Context l Pension Scheme

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Always money purchase schemes Funded by member and employer contributions, on a money purchase basis Employer’s may contribute through “Group” personal pensions which will brand them with the employer name. However note that the payments will still come form the pension provider rather than the employer. Stakeholder pensions – now being phased out NEST – offered by the government On retirement, generally used to buy an annuity

DUE DILIGENCE FOR PENSIONS 

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May need support from an Actuary to look at the state of the scheme. A company with one or more final salary schemes will need to have a regular report by a firm of actuaries on whether the schemes are sufficiently funded to meet the pensions liabilities. The actuaries will look at the number and nature of retired or existing employees within the scheme, and the assets within the scheme, and will decide whether the scheme is in surplus or in deficit. It is generally more likely that a scheme would be in deficit than surplus. Companies may make one-off contributions to pension schemes to get it out of deficit rather than paying it in dividends/reinvesting in the business – this can be unpopular with shareholders.

If the buyer is inheriting a pension scheme it will want in relation to each occupational pension scheme operated by the target or in which the target participates or has participated in the past:

Details of…

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Pension Due Diligence (Anonymised) all those members of the schemes who are, and, in the case of a share sale, were employed by the target Any additional or enhanced benefits that have been promised to members of any scheme whether pursuant to or outside the scheme Any regulatory investigations by the Pensions Regulator The current trustees of each scheme and evidence of their appointment Any claims against any of the trustees of any of the schemes The recovery plan in place in relation to each underfunded final salary scheme Any contributions which the target has agreed to pay to personal pension schemes If it is a multi-employer scheme, the companies which participate in the scheme and the contributions they are obliged to make Any unapproved pension arrangements (i.e. those not registered with HMRC) Any employees who have opted-out of auto-enrolement and copies of any opt-out letters held in respect of those employees

Pensions in a Transactional Context Copies of…

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Confirmatio n that…

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The trust deed and rules, members' handbook and any announcements to members The formal “schedule of contributions” required under the Pensions Act 2004 Any contribution notices or financial support directions issued by the Pensions The latest trustee annual reports and audited accounts for each scheme The latest actuarial valuation Any correspondence between the target and the Pensions Regulator regarding auto-enrolment including details of its registration Any enforcement or penalty notices issued by the Pensions Regulator in respect of auto-enrolment Any records kept in accordance with the target’s record keeping and compliance duties under auto-enrolment Each scheme is registered with HMRC All the contributions to each scheme are up to date Any final salary scheme is sufficiently funded

EMPLOYERS’ OBLIGATIONS

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Auto-enrolment (employer contributions are 3% per year) Employee may have contractual rights to receive a pension – so need to check employee service contracts Following a TUPE transfer there are certain obligations (below)

PENSIONS TREATMENT IN ASSET SALES Pensions Treatment in Asset Sales Personal  If the employment contract provides for contributions to a personal Pension pension scheme, all rights and liabilities will transfer under TUPE Scheme Occupationa  Occupational pension scheme rights/liabilities do not transfer (R.10(1) l Pension TUPE). Instead, the Pensions Regulation provide that the buyer must provide a statutory minimum pension scheme to its new employees. Scheme Employer would have the choice of the scheme.  Rights which do not relate to benefits for old age, invalidity or survivors are not treated as part of the scheme (R. 10(2)), so will transfer  NB the CJEU decisions in Beckmann v Dynamco Whicheloe Macfarlane Ltd and Martin v South Bank University have given a restrictive definition to the R.10(1) exception, holding that enhancements payable for redundancy or voluntary severance did transfer BUT PENSION PROTECTION REGULATIONS  

The R.10(1) exception is subject to the ss.257 and 258 Pensions Act 2004 and Transfer of Employment (Pensions Protection) Regulations 2005 An employee will qualify under ss. 257 and 258 PA if: 1. The seller’s scheme was a defined benefit scheme; or

Pensions in a Transactional Context

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2. The seller’s scheme was a defined contribution scheme and either the seller was obliged to make employer contributions or if the seller was not obliged to contribute but had done so voluntarily in the past “Protection” means the buyer must provide access to a pension scheme The buyer has discretion what kind of scheme to offer If the buyer provides a defined contribution scheme (likely), the buyer may choose between: o Matching employee’s contributions to a maximum of 6%; or o Matching the seller’s contributions (usually lower than 6%, at least 3% - likely to be cheaper so more likely to be chosen)

ALSO CHECK AUTO-ENROLMENT 

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If the buyer was already subject to auto-enrolment provisions prior to the business sale, it must ensure any eligible jobholders who transfer to it as a result of the sale are enrolled into its qualifying scheme within 1 month of the transfer and with effect from the date of the transfer Employer contributions are 3% per year

S.75 PENSIONS ACT LIABILITY

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If the selling company participated in a group defined benefit pension scheme which is in deficit and all of the employees who are active members of the scheme transfer to the buyer, then a s.75 Pensions Act liability will arise for the selling company This is essentially to stop a group trying to default on its liability via the back door Multi-employer Final Salary (DB Scheme) Target’s employees cease to participate in Multi-employer scheme Scheme in deficit Exit triggers liability – s.75 Pensions Act Target liable for its proportions of deficit On share sale, B needs indemnity from S/price reduction/require buyer to walk away

PENSIONS TREATMENT IN SHARE SALES Pensions Treatment in Share Sales  Warranties should be sought that the Scheme is sufficiently Single funded Employer Occupationa  Change of control of the scheme’s principal employer would require notification to the Pensions Regulator under s.69 l Schemes Pensions Act 2004 MultEmployer Occupationa l Scheme

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If a defined benefit scheme and is in deficit, liability arises out of s. 75 of the Pensions Act 1995 Target will leave the scheme upon leaving the group and employees will cease to be active A company ceasing to participate in a multiemployer defined benefit scheme (no longer has any active members) can become liable for a proportion of any deficit which exists within the

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scheme, owed to the trustees B will normally ask a seller to indemnify it against possible s. 75 liability, which may be too substantial and will require restructuring of the sale No s.75 liability arises in relation to money purchase schemes as no funding deficit arises

OPTIONS FOR EMPLOYEES Where employees have to leave a scheme, they have the following options: 1  Transfer their accrued entitlements into an occupational pension scheme operated by their new employer (if the trustees of that scheme are willing to accept the transfer) 2  Transfer their accrued rights into a personal pension scheme 3  Leave their accrued rights in their previous scheme and become deferred members of that scheme PENSION PROTECTION FUND, PENSIONS REGULATOR PENSION PROTECTION FUND 

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If an employer which is responsible for funding a final salary or other defined benefit pension scheme for its employees goes into administration (whether or not it subsequently becomes insolvent) and there are insufficient assets in the pension scheme to pay the pensions promised to the scheme’s members, then the scheme will “fall into” the PPF The PPF will provide compensation to the scheme’s members to prevent them losing their pension rights

PENSIONS REGULATOR 

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The Pensions Regulator can issue a contribution notice requiring a specified amount to be paid into a pension scheme where the person has been a party to: o an act or failure to act, one of the main purposes of which was to prevent recovery of, avoid, or reduce a section 75 liability; or o an act or a failure to act that has had a ‘materially detrimental’ effect on the likelihood of scheme benefits being received by beneficiaries provided it is reasonable in the circumstances to do so The Pensions Regulator can issue a final support direction requiring a person to make appropriate contributions to the scheme or provide some form of guarantee The Pensions Regulator operates a clearance procedure under which it can be asked to confirm, in advance, that it will not use its powers to issue contribution notices or financial support directions in relation to a particular scheme, and a particular event (i.e. transaction) This has become less common because they are difficult and expensive to deal with Instead it is now commonplace for the parties to engage with the target’s pension scheme trustees prior to signing of the sale agreement, and to provide some form of

Pensions in a Transactional Context ‘mitigation’ to the scheme, in order to ensure that its interests are adequately safeguarded (and to provide justification for not involving the Pensions Regulator itself EMPLOYEE’S PERSPECTIVE

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Choices on leaving seller’s scheme: o Transfer “pot” into buyer’s scheme (Pensions Schedule in Acquisition Agreement) o Transfer “pot” into personal scheme o Leave “pot in seller’s scheme – become a deferred member...