Occupational Pensions and business transfers: Employers’ Powers and Trustees’ Obligations. Institute of Employment Rights 18 November 2009. A case study: Visteon. Late 1990s: Ford sets up a separate operating division under the name of Visteon Incorporates Visteon
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Institute of Employment Rights
18 November 2009
Late 1990s: Ford sets up a separate operating division under the name of Visteon
May 2000: staff transfer to Visteon
At the time, Ford pension funds in surplusSpin-off
“ the name of VisteonThe EWC agreement guarantees that Visteon employees transferring their past service benefits to the Visteon Fund will receive the same benefits as in Ford, both now and in the future for all their pensionable service.”
“The Visteon UK Pension Plan will replicate the benefits offered by the ford Pension Funds. There will be no difference in the benefits for Ford Pension Funds and Visteon employees who join the Visteon UK Pension Plan.”Pension promises
“If Visteon were to be liquidated after the Plan is established, there are legal safeguards in place to ensure that the Plan is funded at least to the level that all pension benefits accrued to date are secured. It is the trustees’ responsibility to ensure that these legal requirements are met.”
“[if Visteon becomes incapable of funding the Plan] safeguards are in place to protect the Plan’s assets and the funding of benefits... the Company’s contribution rate must be confirmed by the Actuary of the Plan as being adequate to meet the Minimum Funding Requirement specified by the Pensions Act 1995... the trustees are responsible for ensuring that the Plan is adequately funded and that the assets are securely held.”... More promises
1 April 2001: funds transferred established, there are legal safeguards in place to ensure that the Plan is funded at least to the level that all pension benefits accrued to date are secured. It is the trustees’ responsibility to ensure that these legal requirements are met.”
Basis: past service reserve capped at share of fund, so pension plan in deficit from day one
Company: “I can confirm the company’s commitment to sponsoring the Plan as an ongoing concern, with a target funding level of 100% on the selected ongoing basis and fully meeting tits funding responsibilities both statutory and fiduciary, towards Plan members”
Commitment to maintain the scheme, and to make good the deficit over the average working life of the members
2009: company goes bust, and members will end up in the Pension Protection FundPension transfer
Offer membership of a defined benefits scheme which meets a minimum standard:
Pension age must be no later than the member’s 65th birthday
Benefits must accrue at the rate of at least 1/80th for each year of membership (with a maximum of 40 years)
The pension must be calculated on at least 90% of the member’s “band earnings”
50% pension for a surviving widow, widower or civil partner (but not necessarily an unmarried partner)
indexed at RPI increases or 5% if lower (2.5% for service after 6 April 2009)
The scheme actuary must also certify, following the prescriptions of a Guidance Note issued by the ASB, that the scheme is adequately funded.Default position for future service: option 1
the scheme must provide for employer contributions which match employee contributions up to a maximum of 6%.
Employees can be permitted to pay more, but the employer’s liability is capped at 6%.
Occupational trust-based defined contribution schemes are increasingly rare and, again, are unlikely to be offered unless they already exist for the transferee’s other employees.
No question of adequacy of funding – it’s a DC scheme
Is this a good deal?Option 2: DC alternative
offer membership of a stakeholder pension scheme to which the employer makes contributions.
A stakeholder pension scheme is in reality nothing more than a personal pension, set up as an insurance contract between the member and an insurance company.
Same 6% matching employer contribution
In practice, if the transferee has no scheme then this is the alternative which will be offered. Even if the transferee has a defined benefit or trust-based defined contribution scheme available, this will be the option it is likely to favourOption 3: Stakeholder alternative
Offer membership of a pension scheme that provides benefits that are the same, “broadly comparable” or better
The same requirement arises if a contract is re-let: a so-called second generation transfer.
GAD says that a broadly comparable scheme is one that, in the opinion of a qualified actuary, provides that no identifiable employee will suffer material detriment overall in terms of their future accrual of benefit when compared to the public sector schemePublic sector default
N x FPS
N x P
Directive on the Activities and Supervision of Institutions for Occupational Retirement Provision (“IORP”)
Pension Protection Fund
Protection from the unscrupulousA New Settlement: Pensions Act 2004
Stringent timescales and penalties
But on its own, calls for a file to be opened and no moreTPR: Notification
“…the responsibility for ensuring that schemes are fully funded rests with trustees and employers with the help of their advisers – the regulator will not interfere with this responsibility where it is discharged consistently with their own duties.”
Consultation Report (May 2006)
No direct power to approve or reject, but will cross-examineScheme Funding
“Trustees should aim for any shortfall to be eliminated as quickly as the employer can reasonably afford. What is possible and reasonable, however, will depend on the trustees' assessment of the employer's covenant.”
TPR says it is the referee. Trustees and employer are the playersNegotiating a Funding Plan
Anti-avoidance measures: “moral hazard” provisions quickly as the employer can reasonably afford. What is possible and reasonable, however, will depend on the trustees' assessment of the employer's covenant.”
Potential need for urgent action so light touch in the legislation
Detailed non-statutory guidance from TPRClearance
A pension scheme in deficit should be treated in the same way as any other material unsecured creditor.
Trustees should be given access to information and decision makers; in return they should accept confidentiality responsibilities.
Conflicted trustees should recognise their position.
All parties to clearance should act in accordance with issued guidance.
The regulator will wish to know about all events having a materially detrimental effect on the ability of pension scheme to meet its liabilities.TPR’s Guidance
Change in priority way as any other material unsecured creditor. :
a change in the level of security given to creditors. For example: the granting or extending of a fixed charge or floating charge.
Return of capital:
a reduction in the overall assets of the company. For example: paying dividends, share buy backs, dividend strips, distributions in specie and demergers.
Change in control structure:
a change in the group structure of an employer, which reduces the overall employer covenant. For example: change of employer or participating employer, or a change of parties connected or associated with the employerClearance should be considered when:
Section 38 PA 04 way as any other material unsecured creditor.
(3) The Regulator may issue a contribution notice to a person only if-
(a) The Regulator is of the opinion that the person was a party to an act or a deliberate failure to actwhich falls within subsection (5),
(5) An act or a failure to act falls within this subsection if-
(a) The Regulator is of the opinion that the material detriment test is met or the main purpose or one of the main purposes of the act or failurewas-
(i) To prevent the recovery of the whole or any part of a debt which was, or might become, due from the employer in relation to the scheme under section 75 of the Pensions Act 1995 or
(ii) otherwise than in good faith, to prevent such a debt becoming due, to compromise or otherwise settle such a debt, or to reduce the amount of such a debt which would otherwise become due,The Emperor’s New Clothes
(4) ... the Regulator must have regard to such matters as it considers relevant, including (where relevant)-
(a) the value of the assets or liabilities of the scheme...
(b) the effect of the act or failure on the value of those assets or liabilities,
(c) the scheme obligations of any person,
(d) the effect of the act or failure on any of those obligations
(e) the extent to which any person is likely to be able to discharge any scheme obligation in any circumstances...,
(f) the extent to which the act or failure has affected, or might affect, the extent to which any person is likely to be able to do as mentioned in paragraph (e), and
(g) such other matters as may be prescribed.
TPR can way as any other material unsecured creditor.
Issue Improvement Notices
Wind up the scheme
- If the trustees can’t or won’t look after the schemePolice Action
Consultation under TUPE way as any other material unsecured creditor.
Consultation Regulations (from DWP)
No effective remedy
No code of practice
TPR admits that it is a low priorityA Role for Unions
Trustees are well-informed way as any other material unsecured creditor.
TPR is well-informed
But common law and statutory obligation not to tell
Why? C.f. City Code on Takeovers and MergersConfidentiality