Get (re)organised - 8 key pensions questions for employers to consider on a group reorganisation

In recent years, UK corporates have increasingly turned to reorganising their group structures as a strategic response to economic uncertainty, regulatory change, and the drive toward increasing operational and capital efficiency.

This typically involves an intra-group transfer of assets - which may be the shares in another group company or the business of another group company (including employees) - from one or more group companies to another, but can also involve distributions or returns of capital, reallocation of intra-group debt, or an insolvency process.

It will come as no surprise (in an article written by a pensions lawyer…) that the pensions aspects of any group reorganisation are important: if the group to be reorganised sponsors an occupational defined benefit (DB) pension scheme, the impact of any reorganisation on that scheme (and its members) will need to be carefully considered - even if any transfer of assets is expected to have a neutral (or even positive) effect on the scheme or where the entitlements of members are not intended to be affected.

There can be numerous pensions angles to a group reorganisation, but eight key questions a sponsoring employer of an occupational DB scheme should ask itself are: 

1. Will the reorganisation impact the employer covenant? 

The trustee (with their covenant adviser) will want to consider the effect on the reorganisation on the strength of the employer(s) supporting the scheme (and may be entitled to be informed and consulted on the reorganisation; see 7 below). This will largely depend on the pre- vs. post- transfer financial circumstances of the employer(s) in the scheme relative to the scheme’s solvency deficit.

If the trustee identifies any detriment to the employer covenant post-transfer, it may seek to negotiate mitigation from the employer.

2. Will the reorganisation impact on trustee security / contingent funding arrangements?

If the group has granted any security, guarantees or other contingent support in favour of the trustee, the terms of those arrangements will need to be reviewed to confirm whether the reorganisation could crystallise any obligation in relation to the scheme – for example, enforcement rights over security or a contingent cash contribution becoming payable.

Equally, even where no obligation is directly triggered, an employer will need to consider whether the nature of any contingent support may affect, or be affected by, the reorganisation - for example,  if any assets over which the trustee has security are proposed to be transferred, trustee consent to the transfer may be required; or, where the business or assets of a group guarantor of the obligations of an employer to a scheme are proposed to be transferred, this may affect its creditworthiness and, in turn, its ability to fulfil its obligations under the guarantee – potentially requiring a replacement guarantor.  

If any contingent support is materially weakened as a result of the reorganisation, this is likely to weigh on the trustee’s overall assessment of the reorganisation’s impact on the employer covenant.

3. Will any transfer of employees affect continuity of benefit provision?

If any intra-group transfer of employees would result in active members no longer being employed by an employer in the scheme, the new employer may need to be admitted as a participating employer in order for ongoing accrual to be maintained post-transfer.

Equally, it is relatively common for certain “active deferred” member benefits (usually granted to former active members on a scheme’s closure to accrual) to be contingent on remaining in “service” (i.e. employment) with an employer in the scheme.

In either case, the scheme’s rules need to be checked to ensure whether members may – post-transfer – remain entitled to the same actual or prospective entitlements as before the transfer. If not, either the new employer may need to become a participating employer in the scheme, or, in the case of “active deferred” benefits, a rule amendment may be required (if permissible) to allow “service” with a non-participating employer to count toward any prospective benefit entitlements.

4. Will the reorganisation trigger a section 75 debt?

A statutory debt under section 75 of the Pensions Act 1995 may be triggered on a transfer of employees from one employer to another entity. This can occur where, in a multi-employer scheme, one employer ceases to employ at least one active member in a scheme, when, at the same time, another employer (who is not a defined contribution (DC) employer) continues to employ at least one active member. This is known as an “employment-cessation event”. If a statutory debt is triggered by the employer ceasing to employ any active members, the debt will either need to be paid to the trustee or apportioned (i.e. transferred) to another employer.

If the current employer is the only employer in the scheme, an employment-cessation event cannot be occur (as it would be a sole, not a multi-employer scheme). Similarly, if all members in the scheme are deferred or pensioner members (and there are no active members), no employment-cessation event will occur (but note the following trapdoor here: “active member” for employment-cessation event purposes can also include an “active deferred member” (i.e. a member who is not accruing future pension benefits, but who remains in “service” with an employer for the purposes of qualifying for one or more other benefits under the scheme, meaning an employment-cessation event could still occur in a scheme which is closed to future accrual).

5. What is the effect of TUPE in a pensions context?

TUPE generally applies on a transfer of assets comprising a business from one company to another (such that the employment of any employees “assigned” to that business automatically transfer by operation of law). This gives rise to two main pensions considerations (see also 6 below):

• if any transferring employees are entitled to enhanced pension rights on early retirement, redundancy or termination of employment under an occupational pension scheme, these rights may, contrary to the general pensions exclusion in TUPE, transfer with the employees so as to become an unfunded contingent liability of the new employer. The scheme’s rules should be checked to confirm if any members are entitled to such enhancements, and, if so, whether they would be fully-funded via the scheme in order to avoid the new employer from inadvertently being liable for their provision.
• the Pensions Act 2004 sets out the minimum level of pension provision that a new employer must, post-transfer, provide to  members who were active in an occupational pension scheme (whether DB or DC) before the transfer. If any members are to participate in a different group pension arrangement than prior to the transfer, it is important to ensure that the new pensions arrangement complies with statutory requirements.

6. Do you need to consult employees (or their representatives)?

If certain prescribed changes to the scheme are proposed in conjunction with any reorganisation (e.g. closure to accrual, changes to members’ contributions or changing the basis of future accrual from DB to DC, among others), a 60-day consultation obligation with the representatives of affected members may arise under the Pensions Act 2004.

If any changes are proposed in relation to pensions in connection with the transfer of employees under TUPE, a separate TUPE consultation obligation may also arise - this is wider than the obligations imposed by the Pensions Act 2004 and may therefore catch pension changes which would not otherwise require a formal 60-day consultation under the Pensions Act 2004.

7. Do you need to notify the Trustee?

Employers are required to notify trustees of events which they might reasonably believe to be material to the trustee’s functions within one month of their occurrence (Scheme Administration Regulations 1996, Regulation 6). Even if the re-organisation itself is not thought to meet this threshold, it is common for employers and trustee to have negotiated a formalised information sharing protocol which may require disclosure of certain corporate activity, the terms of which should be reviewed. 

Trustee consent may also be required if a new employer is to become a participating employer, or a rule amendment is required (see 3 above) or to apportion any statutory debt (see 4 above).

8. Do you need to notify the Pensions Regulator (TPR)?

If any participating employer in the scheme will cease to carry on its business (e.g. because the assets comprising that business will be transferred to another group company), the employer must notify TPR. Failure to do so without reasonable excuse may result in the imposition of a fine of up to £1m. 

If you are considering a group reorganisation and one or more companies in that group sponsors a DB scheme, please get in touch so we can guide you around the traps identified above.