Pensions, mergers and acquisitions and reconstructions.
The terms, conditions and status of a pension scheme, in particular, the employer’s funding obligations, may impact critically upon the value of the employer company. Accordingly, a review of the pension scheme’s obligations, funding and compliance status is essential for a purchaser of the company or the business, in order to understand the liabilities, and contingent liabilities, of the company.
In the case of an employer company with a defined benefit scheme, it is essential for a purchaser to ascertain the funding status. Where there is a deficit which must be funded by the employer, this will impact directly on the company’s value. Provision may be made to adjust the price, post completion, if the precise position cannot be ascertained, prior to completion of the sale.
A surplus within the pension scheme may be capable of being reimbursed to the employer. It is more likely that, at most, a contribution holiday may be permissible. Either circumstance may add value to the business from the perspective of the seller.
In the case of a sale of a business, the purchaser will not (usually) become liable for the pension obligations of the seller. The purchaser may agree to take over the pension scheme. The entire pension scheme may be transferred if the entire business is purchased. Alternatively, where a part only is acquired, a partial transfer may be undertaken. The terms of the sale agreement will regulate the transfer.
The Protection of Employment (Transfer of Undertakings) Regulations (so called TUPE), which implements the Acquired Rights Directive, provides generally that on the sale or other transfer of an undertaking (i.e. an entire business), the rights and obligations of the employer are transferred to the successor employer. However, there is an exception in respect of most types of pension schemes.
The employer’s rights and obligations in respect of old-age / retirement type benefits, invalidity and survivors’ benefits under pension schemes, are not subject to the TUPE Regulations. The Regulations exclude only these types of benefit. They do not exclude other types of benefits. The purchaser may become liable in respect of accrued and continuing obligations in respect of these benefits.
Effect on Pension
In a business purchase, the pension fund of the employees of the acquired business may be transferred to the purchaser’s existing scheme or to a new scheme. Employees and former employees who have rights under the scheme, will at the least, enjoy the preserved benefit provisions of the Pensions Act. The employees may have options to take deferred benefits under the existing scheme, depending on its terms and conditions.
They amount required to be transferred may be the subject of negotiation between the seller’s and purchaser’s actuaries. There may be a surplus or shortfall in the scheme. The scheme documentation may provide that the matter of a bulk asset transfer, is within the control of the trustees. The parties will wish to be satisfied that the amount transferred is appropriate.
The employer may be entitled to discontinue the scheme. This will depend on the terms and conditions of the trust deed. The preserved benefit provisions apply upon cessation of the pension scheme. Preserved benefits arise where, when the employment ceases to have the benefit of an occupational pension scheme.
The employees are entitled to information regarding their preserved benefit options. They may elect to leave benefits in the scheme, transfer the funds to a new scheme, a buyout bond or a PRSA.
The trustees of the pension scheme will not usually be a party to the purchase and sale contract and will not be bound by it. The trust deed may grant rights to the sponsoring employer, which may include the right to discontinue or reduce contributions. The terms of the fund or the trust documentation must be considered in the context of the purchaser’s expectations and requirements.
Steps may be required under the scheme, including amendments, in order to give effect to a proposal, such as for discontinuance of contributions. The buyer may wish to ensure that the company will have the right to take the requisite steps. It may require that the requisite steps are undertaken before the sale of the company. It may be necessary that there is there is a full or partial winding up of the scheme assets.
In the purchase of a company, detailed warranties will be required on a range of matters relevant to the pension scheme. If there is no pension scheme or promise, as will commonly be the case, this should be warranted.
In tandem with the warranties, disclosure will be made by the seller. The effect of the disclosures may require an adjustment in the purchase price. Indemnities may be required in respect of specific unexpected contingencies.
If there is a scheme, the buyer will require a range of warranties and indemnities in relation to it. Indemnities may be required in relation to funding and financial liabilities. Warranties may be required in relation to the full range of compliance matters.
The buyer will wish to be satisfied that the scheme documentation is in order. It should be consistent with the underlying employment contracts, announcements and information disclosed. It should be properly funded.
The due establishment of the scheme, its proper documentation and the issue of explanatory booklets and announcements should be warranted. Registration and compliance with Pensions Act and Revenue requirements should be warranted.
It should be verified that the Pensions Act and Revenue requirements have been complied with. Most basically, the scheme must be registered with the Pensions Authority and Revenue Commissioners. Insurance should be in place, where required, and its terms should be checked.
The purchaser will wish to ascertain that there are no potential civil or criminal liabilities arising from breach of the Pensions Act. Civil and criminal liability for Revenue obligations must be considered.
Breaches of equality obligations may not be immediately apparent. Unlawful inequalities which have entered the scheme for historical reasons may lead to the possibility of an equality complaint being made and upheld.
Any potential disputes should be considered. Warranties should be given in relation to litigation or arbitration and relating to disputes pending, known or threatened.
In the case of a defined benefit scheme, the purchaser of the employer company will wish to be satisfied actuarially, that the scheme is properly funded. The statutory actuary valuation certificates should be examined. Further valuation and actuarial advice will be required, in order to ascertain whether any price adjustment is required.
It should be warranted that no contractual pension promises have been made, which are not funded. Particulars of funded and unfunded promises should be disclosed, if any. Issues may arise in relation to ex gratia promises and benefits. It may be claimed that they have become customary. Even if they have not become legally binding, they may be relevant to the exercise of discretion and from an industrial relations perspective.
In the case of a defined benefit scheme, the seller should warrant that it is properly funded. If not, appropriate disclosures and adjustments will be required. The basis of funding and the assumptions should be set out. There will be assumptions in relation salary increases, investment return and numbers of members in service, etc.
The accounts, actuarial report and annual report should be warranted. Compliance with equality provisions should be warranted. Particulars of information disclosed and announcements made to members should be warranted.
The payment of contributions due by employer and employee should be warranted. Benefits which are required to be insured should be warranted to be properly insured.
Where there is insufficient time for the purchaser to establish a new scheme, provision may be made for ongoing participation in the seller’s scheme (in the case of a business sale or group scheme in the case of a sale of a subsidiary) for a period. This may require the consent of Revenue Commissioners.
The circumstances and time exigencies may require that the calculation of any funding shortfall or overfunding will be the subject of agreement or determination by the parties’ respective actuaries, post-completion. This may lead to a later adjustment in the price and / or the release or payment of retained funds.
The amount to be transferred may not be fully within the control of the buyer and seller. The amount of a bulk transfer out may be determined by the terms of the trust deed, which is primarily due within the competence of the trustees. The terms of the agreement may, therefore, require, that the buyer or seller make a compensating payment, if the amount assumed to be paid for the purpose of the agreement, differs from the amount the trustees are ultimately obliged to pay.
There is provision for bulk transfers of funds in pension schemes. Bulk transfers include transfers by scheme trustees of money or other assets in the discharge of liabilities to provide benefits, to another scheme, PRSAs or other vehicles. This is regardless of whether the schemes are with the same employer or with different employers. There is power to make the regulations in relation to the provision of information to members.
Where there is no provision for the consent of the members to the transfer, they must be afforded the opportunity to make observations to the trustees or the employer. Due regard must be had to these observations.
The legislation invalidates changes in rules and the use of discretionary powers done in order to increase benefits to members, so as to materially alter the balance of interests between members or members and employers, made within 12 months before or six months after the transfer date.
The Minister may make regulations to the effect that amendments to rules or the use of powers are to be void unless the members have either consented to it in writing or an actuarial certificate is given in prescribed terms or the trustees are satisfied that the change was not made with a view of materially altering the balance of interested members under the scheme between members or groups of members or between members and the employer for the purpose or pursuant to the event (transfer, agreement for sale, etc.).
In the purchase of assets, the interest of the trustees is likely to differ from those of the selling or purchasing employer. They should be separately advised. There are fiduciary considerations. Duties and obligations may conflict with the wishes of the purchaser and seller.
Issues may arise where a group company or a part of a business is purchased, which is a pension benefits profile which differs to that of the scheme or group scheme as a whole. The funding requirements and projections appropriate to the entire company or the entire group, may not be applicable to the part or subsidiary purchased. They may understate or overstate the projected pension liabilities for the relevant cohort of employees.
If a company or a business is acquired, in order to be incorporated or consolidated into a larger group, consideration may be given to merging its pension scheme into a group pension scheme. Alternatively, it may be retained and modified. It may be closed.
References and Sources
Irish Pensions Law & Practice Buggy, Finucane & Tighe 2nd Ed (2005) Ch. 18
Pensions; Revenue Law and Practice (ITI) Dolan, Murray, Reynolds, McLoughlin (2013)
Trustee Handbook the Pensions Authority 5th Ed 2016
Statutory Guidance the Pensions Authority (Various)
Pensions Law Handbook 12 Ed Nabarro Nathanson Bloomsbury
Corporate Insolvency 6e: Employment & Pension Rights (6th Revised edition)
Occupational Pensions (Subscription) Lexis Nexis
Pensions Law and Practice with Precedents (Subscription) Sweet & Maxwell
Sweet & Maxwell’s Law of Pension Schemes (Subscription)
The Guide for Pension Trustees World Economics Ltd
The Guide for Pension Trustees website, you can:
Tolley’s Pensions Law Looseleaf Service (Subscription)
Pensions Act, 1990
Pensions (Amendment) Act, 1996
Pensions (Amendment) Act, 2002
Pensions (Amendment) Act, 2006
Social Welfare and Pensions Act, 2005 (Part 3)
Social Welfare Reform and Pensions Act 2006
Social Welfare and Pensions Act 2007
Social Welfare and Pensions Act 2008
Social Welfare (Miscellaneous Provisions) Act 2008
Social Welfare and Pensions Act 2009
Social Welfare and Pensions (No. 2) Act 2009
Social Welfare (Miscellaneous Provisions) Act 2010
Social Welfare and Pensions Act 2010
Social Welfare and Pensions Act 2011
Social Welfare and Pensions Act 2012
Social Welfare and Pensions (Miscellaneous Provisions) Act 2013
Social Welfare and Pensions Act 2013
Social Welfare and Pensions (No. 2) Act 2013 49/2013
Social Welfare and Pensions Act 2014
Social Welfare and Pensions (No. 2) Act 2014 41/2014
Social Welfare (Miscellaneous Provisions) Act 2015 12/2015
Social Welfare and Pensions Act 2015 (Part 3)