Roderick Ramage, BSc(Econ), solicitor, www.law-office.co.uk
published (by distribution to professional contacts) on 29 December 2004 and
slightly revised on 24 May 2016
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.
Pension schemes in which the sellers are the only or the
main members need to be treated differently from pension schemes whose main
purpose is to provide death in service and retirement benefits for
employees. Owners’ schemes are usually small
schemes (still often referred to as often small self-administered schemes, SSASs) but can include “ordinary” occupational pension
schemes and so called “executive schemes”.
What distinguishes these from schemes for employees is that
owners see their schemes as part of their own assets, but on a sale of the
owners’ company, control of the scheme and its assets passes effectively to the
company’s new owners. The following are
some ways in which control can be exercised by a company to the detriment of
the former member using powers typically found in pension scheme trust deeds:
power to remove and
power to change the
trust deed and rules
power to change the
power to admit new
power to admit new
power to refuse to
permit early retirement.
Usually the trustees have no power to control item 1, so
that even if, as is common, the other powers require the consent of the
trustees, the exercise of the power of appointing new trustees can in practice
give the company power to control those powers, even though it might be
inhibited if the trustees are sufficiently independent in the performance of
One of the most serious disadvantages to the former owner is
that any surplus in the scheme, which is repaid, will be repaid to the company
to the advantage of the new owner and not the former owner. The admission of new members can dilute the
security for the former owner’s benefits, or even reduce them if the scheme is
not fully funded. The effective control
over the scheme’s investment policy could result in property occupied by the
company as the bedrock of the former owner’s pension planning being reinvested
on less advantageous terms. The power to
refuse early retirement is self-explanatory.
Therefore, before shares are sold, not only must the owner
prepare the company for sale but he should also prepare the pension
scheme. The following are some of the
preliminary steps that may need to be taken.
substitute a new
principal employer under the owner’s control;
remove the principal
transfer the owner'
interest out of the scheme eg by an annuity purchase or to a personal pension
change the scheme’s
trust deed and rules to transfer all relevant powers from the company to the
trustees, one result of which is that the trustees become a self-perpetuating
(as an alternative to
step 3) provide in the share sale agreement for the buyer of the company to operate
the scheme solely on the former owner’s instructions and at his expense; and
provide in the share
sale agreement for any surplus funds returned to the company after tax to be
paid to the former owner.
The choice depends on the circumstances and often on the
time scale. Steps 1 and 2 can be the
simplest if the former owner is retiring, but too often the problem is seen
only a short time before completion and so there is no time to take steps 1 to 4,
leaving step 5 (obviously with 6) as all that can be done.
Step 5 is usually the cheapest and quickest option (particularly
if this is a last minute exercise), but has two disadvantages. One is that the former owner is dependent on
the buyer being willing to cooperate in performing his obligations under the
sale agreement. The other is that buyers
are reluctant to retain any legal responsibility for pension scheme in which
they and their employees have no interest, so they can be expected to require
indemnities against costs and liabilities and a limit to the time that it
remains the scheme’s principal employer.
Step 5 is therefore available only if there is no time to do anything
else or if the scheme is required to be kept in existence for a short period
before being wound up following completion of step 3.
The alternative to step 5 is 4, which is preferable in that
control is clearly taken away from the company, but it does require more time
(and costs more) to study the balance of powers in the existing trust deed and
rules and to prepare the necessary deed of amendment.
If the former owner is not retiring, step 1 should be the
preferred option, because he retains control of the scheme. If he has another company carrying on a
business in which he is employed, that company may be able to become the new
principal employer and continue to pay contributions, but it is only if the
scheme is closed and not receiving contributions or accruing further benefits
that that a non-trading company could be created to become the new principal
employer. Step 2 is sufficient if no
more contributions are to be paid to the scheme.
The problem is slightly more complicated if the former owner
is to continue to work for the company after its sale and have contributions
paid into the scheme. In this case steps
4 or 5 (with 6) may be applicable, but with agreement for his continued
membership. It can be further
complicated if anyone other than the former owner is a member, eg a senior
employee who remains with the company.
Cases such as this depend very much on the facts so no general principle
can be laid down, but in addition to the above steps and variations on them. it
will also be necessary to establish, if not already done, how the assets of the
scheme and its future income are to be apportioned between the former owner and
the other member or members.
Apart from this all normal pensions due diligence will be
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