The impact of corporate restructuring on pensions
We have seen a flurry of financial institutions restructuring and streamlining their offshore operations in recent years. In some cases this has meant consolidating the business of local companies in Guernsey and Jersey into foreign companies including English plcs.
Pension scheme restructuring
In so doing, large institutions have to consider significant potential pensions issues, which can arise in a number of ways in a corporate restructuring because there are many different types of pension schemes. Where companies provide an occupational pension scheme, they need to be very careful in the event of a reorganisation about how they transfer their obligations and liabilities to such schemes.
Channel Islands companies operating defined benefit (DB) schemes for existing employees, or who have historically contributed into a DB scheme in respect of former employees, may find themselves facing considerable liabilities when they cease to participate in such pension schemes. Those liabilities must be satisfied or properly transferred as part of the corporate pension scheme restructure.
Corporate pension transfers
When a company in Jersey or Guernsey transfers its business into an English company, the English company will become the new employer of any employees who have been transferred across. Whilst their pension rights will usually be accommodated by the English company, the Channel Islands company must ensure that its obligations under the scheme are formally transferred to the English company. How that transfer is completed will depend on the rules of the scheme. There is no statutory employer debt regime in Jersey or Guernsey, but there is still the potential for liabilities to arise if the scheme rules permit it.
On the other side of the coin, it may be the case that, instead of the local Channel Islands company having its own pension scheme, its employees are members of the group’s English DB scheme. Whilst this means that the employees are already in the right place, the Channel Islands company must be aware that an employer debt could still arise when it withdraws from the English DB scheme.
Where there is not a defined benefit scheme involved, and employees are instead part of a defined contribution scheme, the potential issues tend to be easier to manage. The restructuring process just raises the question of substituting the employer in the relevant scheme, and making sure the obligations are transferred to the new employer effectively.
In any event, the advice to clients embarking on restructurings is to ensure their pensions records are kept fully up-to-date so that they are aware of the potential liabilities that the company may have in various pension schemes. It is wise for clients to be in a position to provide as much information as possible to advisers, to ensure that nothing is missed. Failure to do so can mean overlooking significant potential liabilities, and as the recent case of BHS illustrates, large deficits have the potential to derail entirely otherwise innocuous corporate transactions.
First published by Connect magazine, April 2017
