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PENSION LIABILITY ON INCORPORATION, MERGER OR WINDING UP

Updated 31/3/08. This information updates s.27.9 in The Voluntary Sector Legal Handbook 2nd edition.
The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2008 come into effect on 6 April 2008, easing some of the requirements when an organisation which is a member of a multi-employer defined benefit or final salary pension scheme, such as the Pensions Trust Growth Plan, have a cessation event. The regulations are at www.opsi.gov.uk/si/si2008/uksi_20080731_en_1.

As defined under the Pensions Act 1995 s.75 and the Occupational Pension Schemes (Employer Debt on Withdrawal) Regulations 2005, a cessation event includes, for example, an incorporation where the assets and liabilities of the unincorporated organisation are transferred to the new incorporated body, a merger where all or part of organisation's undertakings are transferred to an existing or new organisation such that the original organisation no longer has any members in the pension scheme, winding up an organisation, withdrawing from the pension scheme, or reaching a point where the organisation has no more active members in the scheme and no eligible employees to whom membership can be offered. It will presumably also occur if a charitable company converts to a charitable incorporated organisation (CIO) when this structure becomes available, unless legislation exempts this situation.

Under the 2005 regulations, when a cessation event occurs the organisation's withdrawal debt crystallises, which means it potentially becomes payable in full — even in an incorporation or merger where the organisation's employees are going to remain in the pension scheme under the new organisation to which they are being transferred. Under the withdrawal debt, the organisation could become immediately liable for the full cost of pensions for its employees who are entitled to draw pensions now or in future, if these have not yet been fully covered by contributions to the pension scheme. And because of legal changes in the way the debt must be calculated, the debt is likely to be significant. One organisation with three employees in the Pensions Trust Growth Plan calculated that it would owe more than £70,000 if its withdrawal debt crystallised; a large organisation calculated its debt at £20 million. But it is important to emphasise that the debt does not become payable unless there is a cessation event.

Under the 2008 regulations:

• Where the cessation event is that there are no more members in the scheme, there is a 12-month grace period during which time the employer will presumably try to get at least one employee to join.
• For other cessation events the pension provider and employer can agree a withdrawal arrangement under which the employer pays a specified amount based on how much has already been paid into the scheme. The employer puts in place a guarantor, agreed by the pension provider, who will if required pay the remainder of the potential debt.
• In an arrangement specifically intended for "ongoing organisations with low levels of liquidity such as charities", the Pensions Regulator can agree with the pension provider an approved withdrawal arrangement, under which the employer can pay a lower amount. Where the cessation event is a winding up to incorporate or merge, the guarantor will presumably be the new incorporated or merged organisation.