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English pension law and overseas businesses – a tough act to follow, but expensive to ignore

English pension law and overseas businesses – a tough act to follow, but expensive to ignore

INTRODUCTION
This note highlights key points concerning English Pensions Law where overseas businesses are selling, buying or operating businesses in the United Kingdom.
State pension provision in the UK is limited and accordingly private sector pension provision is common and highly regulated.

FOCUS OF THIS NOTE
Pension benefits provided by the UK private sector are either defined  contribution (“DC”), or defined benefit (“DB”).

DC pension schemes – the pension benefits depend on the value of the accumulated pension fund at the time of retirement.DB pension schemes – employers promise a pension equal to a fraction of the employees’ salaries. DB schemes are the focus of this note. Although not many DB schemes remain open to new members, many DB schemes still exist. Due to the cost of buying – out pension benefits with insurance companies many DB schemes have found it impossible to wind up.
Overseas businesses investing and/or operating in the UK need expert advice to understand the legal and other risks of a DB scheme. The funds of a DB scheme are held under a trust arrangement and are legally separate from the businesses’ own resources.
Many trust funds are in “deficit” and have insufficient money to pay their promised benefits. The sponsoring employer has to pay extra contributions  aimed at reducing the deficit. However, overseas businesses and owners can also become directly liable to contribute as we explain below.

WHY BUSINESSES OVERSEAS MAY BE AT RISK FROM UK DB SCHEMES
The exposure arises from three principal sources:

  1. UK legislation governing the funding of DB schemes;
  2. the independence of DB scheme Trustee boards; and
  3. the powers of the UK Pensions Regulator (“Pensions Regulator”).
    The combination of UK legislation, DB schemes legal separation from the employer and the powers of the Pensions Regulator together produce serious risks for the employer and overseas businesses.

Practical implications
Keep in mind that:

  1. For the purposes of funding the DB scheme there is considerable focus on the “covenant” (resources) of the employer and its wider group both in the UK and overseas. DB scheme trustees will usually instruct accountants to
    advise on these matters. This may result in scheme trustees pressing for extra funding from the employer and/or support from its owners. The “support” sought may take different forms e.g. a guarantee from the UK
    company’s (overseas) parent company and/or assets such as property being requested as security. In these circumstances the (overseas) business/its owners will need to be very clear about the extent of their legal obligations to comply with such requests; and
  2. the Pensions Regulator has wide powers to force persons connected with a UK employer to contribute towards, or otherwise support the employer’s DB scheme. The persons within the Pensions Regulator’s reach can include not only the overseas parent company and its other group companies, but also directors and the ultimate individual owners of the overseas businesses. Understanding the legal constraints on the Pensions Regulator’s powers is all important.

REAL EXAMPLES
Our above comments are not merely “technical” and unlikely to be relevant in practice. On the contrary, this is a live area as these “real life” examples show:

  1. We are advising a UK employer owned by an EU (non-UK) company where the UK subsidiary is in conflict with DB scheme trustees over extra scheme
    contributions and other matters – potential costs to the business are significant; the Pensions Regulator is also involved. This matter is on-going and was introduced to us by a TELFA firm;
  2. The following two matters are News headlines in the UK at the moment:
    1. the sale last year of the retailer British Home Stores (“BHS”) (ultimately owned by non-UK interests) and operating a large DB pension scheme:
      BHS’ subsequent insolvency earlier this year may result in the BHS Pension Scheme members losing part of their pension benefits;
      that is, unless the Pensions Regulator can persuade the ultimate overseas owners of BHS to meet the pension deficit by paying extra
      contributions (in the region of £500 to £600 million) to the BHS Pension Scheme; and
    2. the proposed sale by the Indian group Tata of its UK steel production business and the impact on the British Steel Pension Scheme.
      The deficit under the British Steel Pension Scheme (estimated to be around £700 million on an on-going basis and £7.5 billion on a buy-out basis) are making a sale very difficult.
      The insolvency of British Steel and the entry of the Pension Scheme into the Pension Protection Fund (“PPF”) may be the only alternative. Under the PPF many members’ pension benefits are reduced.

SUMMARY
DB schemes give rise to particular problems for an overseas business which:

  1. is operating a DB scheme directly through a UK branch or through a UK subsidiary; or
  2. is considering acquiring a UK business or group which has itself, or has somewhere else in its group, present or past DB scheme pension liabilities; or
  3. is considering a sale of interests including DB scheme pension liabilities.
    Pension implications are often “hidden” and can have major cost and liability implications for overseas owners.
    Entry to the PPF may also be problematic where the UK pension scheme’s sponsoring employer is outside the UK – another area where legal advice is key.

For pension advice, or informal discussion on points in this note, please contact:
Clive Weber or Justin McGilloway.

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