Occupational Pensions and business transfers: Employers’ Powers and Trustees’ Obligations

1. Occupational Pensions and business transfers:Employers’ Powers and Trustees’ Obligations Institute of Employment Rights 18 November 2009

2. A case study: Visteon

3. Late 1990s: Ford sets up a separate operating division under the name of Visteon Incorporates Visteon May 2000: staff transfer to Visteon At the time, Ford pension funds in surplus Spin-off

4. “The 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

5. “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

6. 1 April 2001: funds transferred 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 Fund Pension transfer

7. What went wrong?Minimum legal requirements

8. 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

9. Offer membership of a trust-based defined contribution scheme: 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

10. 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 favour Option 3: Stakeholder alternative

11. 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 scheme Public sector default

12. Public sector: GAD certification • GAD must certify before any contractual commitment is made. • If for exceptional reasons the requirement for broad comparability is to be waived, GAD advice on appropriate compensation to staff must be followed. • GAD will provide to the contracting authority an analysis of the key differences and the ways in which the differences balance out overall • The full GAD analysis must be made available to trades unions and staff representatives • At the conclusion of this period, if any points of concern cannot be settled may raise their concerns directly with a nominated Minister • No contractual commitments will be made whilst this process of review and consultation is underway

13. Past service: default position • A preserved pension based on the member’s actual membership of the scheme up to the date of leaving, their actual final pensionable salary as at the date of leaving, and the scheme’s pension fraction or “accrual rate”. Expressed as a formula it is: N x FPS 60 • Where N is their actual service, the accrual rate is assumed to be 1/60th for each year of service, and FPS is their final pensionable salary as at the date of leaving (not what their salary would have been if they had stayed on). • This preserved pension must be increased or “revalued” during the period between the date of leaving and normal pension age broadly speaking, in line with RPI inflation, capped at 5% for service up to 6 April 2009 and capped at 2.5% for service thereafter.

14. Loss of value • The loss of value to the member comes from this revaluation process. If he or she had been allowed to remain in the scheme, the pension earned by past service in a final salary scheme would have been linked to their pay as at the date of retirement. Expressed as a formula again, the value of member’s actual accrued rights is: N x P NS • - where N is their membership to date, NS is the membership they would have had if they had been allowed to stay in the scheme, and P is the pension that they would have built up if they had stayed on until normal retirement age, based on their anticipated pensionable salary at retirement date. • Other losses: ill-health and death benefits

15. Transfer past service rights? • The main losers are: • Younger members who lose out because their deferred pensions are linked to retail prices and not pay • All members, if inflation exceeds 5% (or, for service after 6 April 2009, 2.5%) during the period of deferment • The dependants of any member who dies before retiring. • The law requires the transferor’s scheme to provide at least a cash equivalent transfer value or cash transfer sum for all members with at least three months’ service. • The two employers can, and often do provide for more than the bare minimum: “past service reserve”

16. Directive on the Activities and Supervision of Institutions for Occupational Retirement Provision (“IORP”) Proper management Proper funding Proper supervision Proper communication Pension Protection Fund Protection from the unscrupulous A New Settlement: Pensions Act 2004

17. An early warning system: ranging from the trivial to the serious Stringent timescales and penalties But on its own, calls for a file to be opened and no more TPR: Notification

18. “…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-examine Scheme Funding

19. “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 players Negotiating a Funding Plan

20. Anti-avoidance measures: “moral hazard” provisions Potential need for urgent action so light touch in the legislation Detailed non-statutory guidance from TPR Clearance

21. 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

22. Change in priority: 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 employer Clearance should be considered when:

23. Section 38 PA 04 (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

24. Material detriment • Section 38A PA 04: meaning of "material detriment test” (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.

25. TPR can Issue Improvement Notices Remove trustees Appoint trustees Fine Obtain injunctions Wind up the scheme - If the trustees can’t or won’t look after the scheme Police Action

26. Consultation under TUPE Consultation Regulations (from DWP) Too prescriptive No effective remedy No code of practice TPR admits that it is a low priority A Role for Unions

27. Trustees are well-informed TPR is well-informed But common law and statutory obligation not to tell Why? C.f. City Code on Takeovers and Mergers Confidentiality

28. Conclusion • Trust law: the worst option going apart from all of the others? • The law needs to give stronger information and bargaining rights to employees and unions, or recognise that trustees are not independent • The Regulator is not a substitute for effective member involvement