Spiramus Press

Dealing with Pensions
The practical impact of the Pensions Act 2004 on mergers, acquisitions, restructurings and insolvencies

By Grant M. Jones and Robin Ellison

Dealing with Pensions
Paperback, 490 pages
Published: 23rd June 2006
ISBN: 9781904905066
Format: 234mm x 156mm

Category: Employment, Pay & Pension


Essential reading for trustees of pension schemes, company directors, managing directors, finance directors, company secretaries, actuaries, lawyers, accountants, insolvency practitioners.  

The Pensions Act 2004 provides additional protection for members of defined benefit occupational pension schemes. In doing so it establishes both a pensions regulator and a pensions protection fund. The new rules impose funding obligations on employers which, it was thought by the legislators, employers would attempt to evade.

The legislation therefore includes anti-avoidance provisions, the knock-on effects of which will (1) radically change the way in which companies are bought, sold, restructured and wound-up (whether insolvent or solvent) and (2) create complex dilemmas for pension fund trustees and their advisers.

The anti-avoidance provisions of sections [35 and 39] are intended to protect pension members' benefits, whilst ensuring that it blocks abuses whereby pension liabilities can be offloaded onto the Pension Protection Fund. The provisions however may lead to unintended consequences for some businesses in the same group of companies, in situations where no abuse has taken place, for example:

  •  

difficulties for private equity providers who thus far have viewed their investee companies as stand-alone entities which can be allowed to become insolvent if they fail. Following the legislation, where private equity provider invests in a company with a defined benefit which later falls into insolvency, clause 39 would require other companies invested in by the private equity provider paying towards the deficit that company’s scheme.

 

difficulties for overseas investors who find it hard to quantify the pension liabilities of UK businesses they acquire, especially if the liabilities of one infect the liabilities of otherwise unconnected companies, including those without any defined benefit pension arrangements.

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difficulties for trustees who may be intimidated from assuming appointments as trustees, and/or increasing the cost of trusteeship

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difficulties for employers wishing to establish or continue defined benefit pension schemes

Contents


Preface. iii

Contents. v

Abbreviations used in this book. xii

Legislation and regulations. xiv

Tables of authorities. xv

1          Introduction. 1

1.1  Background.. 1

1.1.1      The kinds of pension promise. 2

1.1.2      Corporate transactions. 4

1.1.3      Insolvency. 4

1.2  Pensions Act 2004 (“PA 2004”) 5

1.2.1      Pensions Regulator (“The Regulator”) 6

1.2.2      Pension Protection Fund (“PPF”) 7

1.2.3      Financial assistance scheme (“FAS”) 8

1.2.4      Disputes. 8

1.2.5      Amending schemes. 9

1.2.6      Vesting. 10

1.2.7      Indexation. 10

1.2.8      Deferment of state pension. 10

1.2.9      Member-nominated trustees or directors (MNTs/MNDs) 10

1.2.10     Surplus repayments. 10

1.2.11     Revaluation. 10

1.2.12     Investment 10

1.2.13     Decision-making. 11

1.2.14     Insolvency and winding-up (Pensions Act 1995 ss.75, 75A) 11

1.2.15     Moral hazard. 11

1.2.16     Preferential liabilities (Pensions Act 1995 s.73) 12

1.2.17     Regulator’s powers. 12

1.2.18     Freezing orders. 12

1.2.19     Implications for insolvency practitioners. 12

1.2.20     Funding and actuarial 12

1.2.21     Trustees’ standard of care. 13

1.2.22     Employment 14

1.3  Finance Act 2004 (“FA 2004”) 15

1.4  European Pensions Directive. 15

1.5  Scheme funding: deficiencies and surpluses. 15

1.6  Outline of this book. 16

2          The issues of funding. 17

2.1  Introduction.. 17

2.2  Pensions Act 2004. 20

2.2.1      Transitional 21

2.3  Pensions Regulator requirements. 21

2.3.1      Code of practice. 21

2.3.2      Agreement with employer. 23

2.3.3      Timing. 24

2.3.4      Summary funding statements. 24

2.3.5      The statement of funding principles. 24

2.3.6      Content of statement of funding principles. 24

2.3.7      Calculation of ‘technical provisions’ 25

2.3.8      Recovery plan. 25

2.3.9      Contingent securities. 26

2.3.10     Schedule of contributions. 27

2.3.11     Changing the benefits: modifying future accrual 27

2.3.12     Actuarial input 28

2.3.13     Providing information to the Regulator. 28

2.3.14     Providing information to members. 29

2.3.15     Special cases. 29

2.3.16     Intervention by the Regulator. 30

2.4  The impact of funding issues on corporate finance. 32

2.4.1      Liabilities of group companies. 33

2.4.2      Accounting. 33

3          Pensions issues in mergers and acquisitions. 35

3.1  Introduction.. 35

3.1.1      Purchaser’s and funder’s objectives. 35

3.1.2      Vendor’s objectives. 36

3.1.3      Trustees. 37

3.1.4      Advisers. 37

3.2  Nature of transaction and financing. 37

3.2.1      Defined benefit, defined contribution and non-trusteed schemes. 38

3.2.2      Documentation. 38

3.3  Sale and purchase agreement 39

3.3.1      Warranties. 40

3.4  Pensions and TUPE.. 46

3.4.1      Introduction. 46

3.4.2      The pensions exclusion. 46

3.4.3      Limited effect of the exclusion. 48

3.4.4      TUPE and the Pensions Act 2004. 49

3.4.5      Summary. 51

3.5  Consultation with employees. 52

3.5.1      Duty of mutual trust and confidence. 54

3.5.2      Pensions Act 1995 s.67. 54

3.5.3      Other requirements. 54

4          Clearance. 55

4.1  Background.. 55

4.1.1      The moral hazard issue. 55

4.2  Whether to apply for clearance. 56

4.3  The Regulator’s methodology. 57

4.3.1      The Regulator’s powers. 58

4.3.2      Background - general 59

4.3.3      Internal process. 60

4.4  Clearance procedure. 60

4.4.1      Guiding principles. 61

4.5  The Regulator’s objectives. 61

4.5.1      Specified events. 62

4.6  Schemes in deficit 62

4.6.1      Classification of events. 63

4.6.2      Type A specified events. 64

4.6.3      Priority. 65

4.6.4      Return of capital 65

4.6.5      Change in control structure. 66

4.6.6      Type B events. 66

4.6.7      Type C events. 67

4.6.8      Parties to clearance. 67

4.6.9      Trustees duty to negotiate on funding. 67

4.6.10     Directors, connected and associated parties. 68

4.6.11     The Regulator’s solutions. 69

4.6.12     The Regulator’s dispensations. 69

4.6.13     The Regulator’s practice. 70

4.7  The Regulator’s powers. 70

4.7.1      Contribution notice. 70

4.7.2      Financial support direction. 71

4.7.3      Financial support arrangements. 72

4.8  Anti-avoidance issues for lenders and corporates. 73

4.8.1      Accounts. 73

4.8.2      Contribution notices against banks. 73

4.8.3      Directors’ duties. 74

4.8.4      Consolidation of group under holding company. 74

4.8.5      Setting contributions. 75

4.8.6      Control of investment powers. 75

4.8.7      Trustees’ positions under CVAs. 75

4.8.8      Company/trustee agreements reflecting loan agreements. 75

4.8.9      Conflicts of interest 76

4.9  Anti-avoidance and clearance. 76

4.10            Future developments. 79

5          Insolvency, Solvency and Reconstruction. 81

5.1  Introduction.. 81

5.2  “Insolvency event”, “insolvency date”, “insolvency practitioner          duties” and ‘what happens upon insolvency’:                                                “the assessment period”. 81

5.2.1      Background. 81

5.2.2      Distinction between ‘insolvency event’ and ‘qualifying

                insolvency event’ 83

5.2.3      Date of notification. 84

5.2.4      Distinction between private and public insolvency practitioners. 84

5.2.5      The assessment period. 84

5.3  Insolvency Practitioner duties: the appointment of an ‘independent person’, formerly the ‘independent trustee’ 85

5.3.1      The Pensions Act 85

5.3.2      The regulations. 86

5.4  Insolvency Practitioner’s duties: ”scheme rescue”. 89

5.4.1      Background. 89

5.4.2      Notices. 89

5.4.3      Definition of a scheme rescue and the Pensions Act 2004. 90

5.4.4      Scheme Rescue and the PPF approval 90

5.4.5      The PPF fails to approve a s.122 notice or the insolvency             practitioner fails to issue a s.122 notice  90

5.4.6      Timing. 91

5.4.7      Members’ views. 91

5.4.8      Fees. 91

5.4.9      Practice. 91

5.5  Pension scheme debts provable in an insolvency. 92

5.5.1      Background. 92

5.5.2      Special issues under the Insolvency Rules 1986. 92

5.5.3      Case law.. 93

5.5.4      The Trust Deed and ‘the debt on employer rule’ 95

5.5.5      The application of the Insolvency Rules. 95

5.5.6      The position of the Regulator and the PPF under the Pensions                  Act 2004  97

5.5.7      The interaction between the Insolvency Act and the Pensions                    Act 2004  98

5.5.8      Winding up. 99

5.5.9      Submission of claims timing and valuation problems. 100

5.5.10     Winding up and timing. 102

5.5.11     What is the section 75 debt?. 102

5.5.12    The special position of public body partially guaranteed                   schemes  103

5.5.13     The special position of hybrid schemes. 104

5.5.14     The special position of multi-employer schemes. 105

5.6  What happens if the PPF does not assume responsibility?. 110

5.7  TUPE Solvent reconstruction.. 112

5.7.1      Sale of business (i.e. assets not shares) by an insolvency              practitioner or others and TUPE  112

5.8  Solvent reconstruction.. 113

5.9  CVAs and creditor approval 113

5.9.1      Background. 113

5.9.2      CVAs and the PPF. 113

5.9.3      Debt/equity swaps. 113

5.9.4      The Occupational Pension Schemes (Winding up etc) Regulations           (the “Winding Up Regulations”) 114

5.10 Personal liability of IPs. 114

5.10.1     Background. 114

5.10.2     The proper functions of an IP. 115

5.10.3     CVA/Administration order. 115

5.10.4     Liquidation and/or administrative receivership. 116

5.11            Clearance Provisions and Insolvency. 116

5.11.1     Turnarounds such as Administration/CVAs. 116

5.11.2     Insolvency: liquidation. 117

5.11.3     The PPF and the provision of information. 118

6          Liabilities: Fund Compensation, Protection and Maintenance. 119

6.1  Introduction.. 119

COMPENSATION... 119

6.2  The assessment period.. 119

6.2.1      Start of assessment period. 119

6.2.2      End of assessment period. 119

6.2.3      Trustees’ powers during assessment period. 119

6.2.4      Liability for breach. 120

6.3  Pension protection - eligible schemes. 120

6.4  What happens if the PPF assumes responsibility?. 121

PROTECTION... 121

6.5  The Regulator’s powers. 121

6.5.1      Improvement notice (Pensions Act 2004 s.13) 121

6.5.2      Third party notices (s.14) 122

6.5.3      Pension liberation. 122

6.5.4      The Relationship of s.18 rights with other powers of the                 Regulator to recover contributions  122

6.6  Fund protection and fraud compensation.. 124

LEVIES    125

6.7  Introduction.. 125

6.8  Pension protection or insolvency levy (s.175) 126

6.9  The PPF Levy Consultation Document and the insolvency levy. 126

6.10 The employer’s responsibility for scheme funding and the              statutory funding objective (Part 3 (sections 221 – 233)) 127

6.11 Liabilities for mishandling affairs under the Pensions Act 128

6.11.1     The public sector (Schedule 1 Part 6/Schedule 5 Part 5) 128

6.11.2     The private sector (s.256) 128

6.12            Transfer of property, rights and liabilities to the PPF ( Schedule 6) 129

6.12.1     Background. 129

6.12.2     The provisos. 129

6.12.3     Continuation of legal proceedings. 130

6.12.4     Trustee personal liabilities. 130

6.12.5     Scheme indemnities to trustees. 131

6.13            The obligation of the PPF during the ‘assessment period’ 132

6.14            The obligation of the PPF following a ‘scheme rescue’ 133

6.15 Application for reconsideration.. 134

6.16            Closed Scheme Application (s.153) 136

6.17            Pension Protection Fund (Entry Rules) Regulations 2005. 137

6.18            The Pension Protection Fund (Provision of Information)                 Regulations 2005  145

6.19            Fund maintenance: Financial Support Directions. 146

6.19.1     Financial Support Directions – Section 43: Background. 146

6.19.2     What is a Financial Support Direction?. 146

6.19.3     Connected, associated and control 148

6.19.4     Insufficiently resourced. 148

6.19.5    What should a Financial Support Direction/Contribution                     Notice contain?  149

6.20 The Pensions Regulator (Financial Support Direction, etc)            Regulations 2005 ("the FSD Regulations") 150

FSD calculation. 156

6.20.1     Stage one calculation for the employer. 156

6.20.2     Stage one calculation for the business associate. 156

6.20.3     Stage two calculation for both employer and business associate. 156

6.20.4     Stage three: calculate the Entity Value Difference (EVD) 156

6.21            Contribution Notices. 160

6.21.1     Background. 160

6.21.2     The Act 160

6.22            Transactions at an undervalue: Sections 52 to 58. 161

6.22.1     Introduction. 161

6.22.2     Section 52. 161

6.22.3     Section 53. 163

6.22.4     Section 54. 166

6.22.5     Sections 55 and 56. 166

6.23            Transaction to defraud creditors – Section 58. 167

6.23.1     Introduction. 167

6.23.2    Insolvency Act 1986 Section 423 (“Section 423”): an initial           explanation  167

6.23.3     Section 423(3) 168

6.23.4     Section 423(4) and (5) 168

6.23.5     Section 424. 168

6.23.6     Section 425(1) 169

6.23.7     Section 425 (2) and (3) 169

6.24            The similarities between section 423 and section 52. 169

6.24.1     The similarities. 169

6.24.2     The differences. 170

6.25            Who represents the wronged member under Section 423?. 171

APPENDICES. 173

A1        Regulatory Guidance. 173

A1.1. Clearance statements: guidance from the Pensions Regulator. 173

A1.2: Application for Clearance. 196

A1.3: The Notifiable Events Framework. 201

A1.4: The Pensions Regulator Code of Practice 02 – Notifiable Events. 202

A1.5: Directions issued by the Pensions Regulator under section 69(1) 

        of the Pensions Act 2004. 209

A1.6: Guidance from the PPF for insolvency practitioners and official            receivers  211

A1.7: Guidance from the PPF for undertaking entry valuation.. 228

A1.8: Guidance from the PPF for undertaking the risk based levy         valuation   238

A2        Legislation. 247

A2.1: Pensions Act 2004 ss.22-58; 120-181; 221-233. 247

A2.2: The Occupational Pension Schemes (Winding Up and Deficiency on Winding Up etc)(Amendment) Regulations 2004 (SI 2004/403) 328

A2.3: The Occupational Pension Schemes (Winding  Up, Deficiency on Winding Up and Transfer Values)(Amendment) Regulations 2005 (SI 2005/72) 332

A2.4: Pensions Regulator (Notifiable Events) Regulations 2005 (SI 2005/900)    335

A2.5: Occupational Pension Schemes (Early Leavers: Cash Transfer Sums and Contribution Refunds) Regulations 2006 (SI 2006/33) 337

A2.6: Occupational Pension Schemes (Scheme Funding) Regulations 2005 (SI 2005/3377) 343

A2.7: Occupational Pension Schemes (Employer Debt) Regulations 2005 SI (2005/678) 378

A2.8: Occupational Pension Schemes (Employer Debt etc) (Amendment) Regulations 2005 (SI 2005/2224) 393

A2.9: Occupational Pension Schemes (Winding up etc) Regulations 2005 SI (2005/706) 406

A2.10: Occupational Pension Schemes (Winding up Procedure) regulations 2006 [in draft] 432

A3        Case law.. 435

A3.1:  Bradstock Group Pension Scheme [2002] 69 PBLR.. 435

A3.2: Phoenix Venture Holdings Ltd [2005] 38 PBLR, [2005]                       EWHC 1379 (Ch) 441

A4        Miscellaneous. 465

A4.1           FSD Flowchart 465

Index. 467



Publication Details:

Binding: Paperback, 490 pages
ISBN: 9781904905066
Format: 234mm x 156mm

Binding: Electronic book text
ISBN: 9781904905387

BIC Code: LNPC, LNPP
Imprint: Spiramus Press


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