pensions post acquisition - participation and deficits

by Roderick Ramage, solicitor, www.law-office.co.uk

issued to professional contacts as at 1 January 2002


DISCLAIMER

This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.


 

On the acquisition of a business or a company with employees, who are members of a pension scheme, where the pension scheme is not exclusively for them but is also for other employees of the seller or its holding and other group companies, should the buyer participate in the vendor's pension scheme for a period after completion?Two advantages are that it provides some continuity for employees and gives the buyer time in which to make new pension arrangements for the future, but there can be risks, which might lead a buyer to avoid participation.

Where the seller's pension scheme is a final salary scheme, there is the risk that the buyer or the company through which the purchase is made might become liable for a shortfall in the scheme.This is unlikely to be an issue with a money purchase scheme.

If the acquisition is of shares in a company which already participates in the scheme, the company is already potentially at risk, but in an assets purchase the buyer does not participate in the seller's pension scheme unless it or the company through which it makes the purchase chooses to do so.This factor can be a factor encouraging the buyer to buy assets rather than shares.At present TUPE expressly excludes occupational pension schemes and it seems unlikely that the expected alteration to TUPE to give pension rightsto transferred employees will involve participation in the transferor's scheme.

In an ongoing situation the employer's contributions are paid in accordance with a contributions, either agreed between the employer and the trustees or imposed by the trustees, and certified by the actuary as adequate to secure that the minimum funding requirement will be met.

The position is different if the scheme is being wound up or the employer goes into liquidation or bankruptcy, when any shortfall in the scheme's assets in relation to its liabilities becomes a debt due from the employer to the trustees.If two or more employers participate in the scheme, they are liable to contribute to it proportionately, and there is a risk that an employer may in some circumstance be liable even after it has ceased to participate in the scheme.

Information disclosed in response to the buyer's preliminary enquiries and draft warranties about the scheme should reveal the state of the scheme's funding and assist the buyer to form a view whether there is a potential liability which might result from buying a participating employer or voluntarily participating in the sellerís scheme after completion and if so whether indemnities will be required against the risk.

As a final thought, whilst the installation of a pension scheme might be delayed for a while after completion, the provision of life assurance should not be delayed, because of the risk of an employee dying in service immediately after completion is real.Therefore, if the buyer decides not to participate in the seller's scheme or the sale terms prevent it from doing so, it becomes important to have death in service insurance in place on completion.

 

copyright Roderick Ramage

 

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