PENSIONS AND CHANGE

Purchase/Sale and Transfer of Undertakings

When businesses are bought and sold, this raises pensions issues. If a company with its own pension scheme is purchased as a whole, then the pension scheme including its assets and accrued liabilities will effectively be acquired along with the company. The acquirer will then need to consider whether it wishes to amend the scheme going forward, in much the same way that it will consider changes to other aspects of reward. It should be noted that in some transactions the funding position of the pension scheme could be a factor in determining the price paid.

If only some employees from a scheme are part of the transaction (for example, because a division or site is being sold), then the situation is different. In law, the vendor's only obligation is to provide leaving-service benefits. However, in practice, for the transaction to be successful, it will be necessary to secure the goodwill of the transferring staff. In this case, a 'bulk transfer' will occur and the terms (ie the monies transferred and the benefits provided) will be a matter of negotiation.

In situations where public sector staff are transferred to the private sector, for example as part of an outsourcing process, there are detailed regulations about what must be provided by the new private sector employer.

The government's 2004 Pensions Bill proposes certain future service pensions obligations on a new employer when a TUPE-protected transfer of undertakings takes place.

Closing a Final Salary Scheme

When an employer moves away from final salary provision, it has a number of options regarding the final salary scheme, as follows:

§  Close the scheme to new entrants only, with existing members continuing to earn benefits as their service increases. This is the most common method, but it takes a considerable time for the employer's financial exposure to be materially reduced.

§  The scheme stops benefit accrual: members receive a pension based on accrual to date of closure and salary at retirement; hence there still remains the potential liability arising from unknown future salary increases.

§  The scheme stops benefit accrual with all employees being provided with discontinuance (typically leaving-service) benefits - normally these are based on accrual to and salary at closure with revaluation to retirement in line with inflation (or 5 per cent per annum compound, if less).