So the board has decided to sell either the whole company or group, or a subsidiary. Let’s say that in each case, there is a final salary pension scheme in the entity being prepared for sale. Gary Cullen, head of pensions at law firm Maclay Murray & Spens, suggests the following checklist of actions that should be taken.
Clean up your data. It goes without saying that the buyer will expect all the data on the scheme to be in good order. This should be a no-brainer, but pensions experts who are asked to look at schemes with a view to a buyout say that the schemes they look at are often extremely messy, with dead members still on the books. It’s a put-off.
Close the scheme to new arrivals – now. In fairness, this has already been done by the majority of UK companies with final salary schemes. This at least caps the problem at the present membership level.
Close the scheme for future accrued benefits. This is harder to do since employees value final salary schemes and will not take kindly to being told that henceforth their pension is being accrued through a different set of arrangements, with the new arrangement in all probability being a defined contribution scheme. This is a hard sell for the company: it should be undertaken in an open and honest way with the case for closure being put clearly to employees.
The likelihood is that the new arrangements will have to look at least as good to the employees as the old arrangements, in terms of the amount of cash being accrued by their pension. The big difference from the employer’s point of view is that the new arrangement commits the sponsoring employer to a ‘defined’ amount, not an undefined amount. The risk that the final sum in the employee’s pension pot will not be sufficient to provide them with a sufficient pension is run by the employee, not the employer.
This does away at a stroke with scheme deficits, enforced contribution catch ups, and so on and so forth. However – and it is a big however – the company remains at risk for any deficit on the benefits accrued up to the point of closure. This will still be a problem for an acquiring company, so they will want a full due diligence exercise showing the scope of the remaining risk.
Also, some employment contracts will have embedded pensions rights in them so the employee may be protected against any attempt by the employer to close the scheme to new accruals as far as the protected employees are concerned.
Examine enhanced transfer. This offers employees either an improved pension or cash in the hand to transfer out of the scheme. The Pensions Regulator (TPR) is very hot on enhanced transfers and will need to be convinced that the employer is making an honest case to the employee, setting out the benefits and disadvantages of transfer, and that the employee has the option of calling on the advice of an independent financial advisor, paid for by the company. An example here would be, say, a scheme that is 70 percent funded, where the employer offers to fund it to 110 percent in return for the employee transferring out.
Examine apportionment arrangement. If the sale concerns a subsidiary with a multi-employer FS pension scheme, you can do an apportionment arrangement, where one of the existing employers in the group takes over as the sponsoring employer. Again, TPR will want to see that this does not weaken the employer covenant.
Shop around for buyout providers. You can look around the market and find an alternative to an insurance company doing a full buyout for the scheme. The Pensions Corporation, for example, will buy schemes for cash and assume the longevity and investment risks on the grounds that they are good at managing those risks.
Consider a full annuity buyout. You can bite the bullet and do a full annuity buyout, or lower the sale price of the company by the cost of the buyout so that the acquiring organisation can close the scheme through a full buyout.
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