Key Pensions Issues for Corporate Lawyers – Part 2

26 May 2021 | Gary Cullen

Welcome to the second part of our series looking at the key pension issues corporate lawyers need to be aware of when advising clients.  In Issue 1 we covered underfunded pension schemes in a corporate transaction.  In Issue 2 we look at how to handle situations where companies with underfunded final salary or defined benefit pension schemes (“DB schemes”) are refinancing or reorganising company assets within a group, which may trigger a requirement for the employer to notify the Pensions Regulator. Incorrectly handled, this can result in a heavy financial levy being made against the company and even its directors and/or shareholders by the Pensions Regulator.

Issue 2 – Financing or Reorganising a Company with an Underfunded Defined Benefit Pension Scheme

If the trustees of a DB scheme are placed in a worse position after the refinancing or reorganisation of a company by having a weaker sponsoring employer covenant, then this may be regarded as a “Type A” event by the Pensions Regulator.  In such a Type A event the Pensions Regulator can protect the pension scheme’s members by:

  • making a financial support direction; or,
  • issuing a contribution notice.

Both can be directed towards not only a scheme employer but also persons connected with a company such as directors.

(An employer’s “covenant” is the employer’s promise to fund the DB scheme.  It is assessed for such purposes having regard to both the extent of the employer’s legal obligation to fund, and the employer’s financial health, both current and prospective).

What Kind of Transactions should I be Concerned About

Type A events can take many forms.  Fundamentally, they all weaken the employer covenant – the ability of the sponsoring employer to meet its ongoing funding commitments.  In the context of refinancing or reorganising company assets such an event is giving priority to an unsecured creditor over the pension scheme.

What can the Pensions Regulator do if there is a Type A Event

If an event weakens the employer covenant then the Pensions Regulator may issue a financial support direction or a contribution notice.

What is a Financial Support Direction?

A financial support direction requires that a financial arrangement be put in place to support a pension scheme.  It can be issued to an employer or any person connected or associated with the employer.

What is a Contribution Notice?

A contribution notice requires an amount to be paid to the scheme, or the Pension Protection Fund, up to and including the cost of purchasing annuities to deliver the defined benefit promised by the pension scheme for all of its beneficiaries, less the available scheme assets.  This is the most costly way of calculating a pension scheme’s liabilities.  The Regulator can issue a contribution notice if it believes that the employer has deliberately failed to address a material detriment to the likelihood of scheme benefits accruing to members, caused by the refinancing or reorganisation.

How can I Avoid a Financial Support Direction or Contribution Notice being Issued

Whether you are acting on behalf of a company with an underfunded DB scheme or a bank involved in a transaction with it, avoiding such an intervention by the Pensions Regulator is vital as it can kill or seriously delay the transaction.

When advising you will need to carefully assess the situation in relation to the pension scheme, and weigh up the risk appetite of your client in terms of potential future action from the Pensions Regulator.  Where the risk of intervention from the Pensions Regulator is high, consider making a “Clearance Application”. A Clearance Application is made to the Pensions Regulator.  It is a statement setting out the facts in order to obtain the Regulator’s agreement not to impose a contribution notice or a financial support direction in relation to a scheme. While an application will add time to the deal, if successful it is an effective way to deal with the risk of potentially punitive regulatory financial intervention.

Bear in mind that the Regulator will expect trustees to be involved in any application relating to their scheme and that they will be asked to comment on whether or not they support the application and to explain why.  Where the transaction does not put the trustees in a worse position they may be supportive, but it is critical that you involve them in the process.  Where the transaction could put the trustees in a worse position the company may need to provide some financial comfort to gain their buy-in.  Remember the employer offering trustees some comfort in return for supporting a clearance application is likely to be more preferable than meeting the funding liabilities which the Pensions Regulator can impose through a financial support direction or contribution notice.

What Type of Mitigation can be Offered to Trustees?

There are different forms of financial comfort which can be offered to trustees in order to facilitate their agreement. These include:

  • An additional injection of cash or other assets into the scheme – for example, part of funds raised through the refinancing process
  • Improving priority – granting a fixed or floating charge to the trustees
  • A bank guarantee
  • A negative pledge – for example, the company agreeing not to increase Directors’ salaries until the debt has been cleared
  • An Employer Escrow Account whereby the Employer pays in funds that will be passed to the trustees in certain circumstances.

How Can We Help?

Whether you are acting for the company, bank or trustees there are many ways that we can help you navigate this complex area. For example:

  • Determining if the transaction is likely to amount to a “Type A” event
  • Advising at an early stage on the best approach for your client to take to avoid an intervention by the Pensions Regulator
  • Helping you identify the comfort to offer trustees in order to avoid a financial support direction or contribution notice
  • Preparing a Clearance Application and negotiating with the Pensions Regulator and trustees
  • Negotiating with third parties in any refinancing or reorganisation transaction in terms of comfort to be offered to the trustees.

Abbiss Cadres has a unique service model incorporating all the expertise needed to help you manage the complexities of your clients’ employment and people issues.  As well as pensions expertise our team includes employment, immigration, tax, compensation and benefits and global mobility specialists.  We have extensive experience of working alongside a variety of corporate law teams, from the world’s largest to domestic firms, to deliver an integrated service to their clients.

If you would like advice on how we can help you with this or another employment related issue get in touch on 0203 051 5711 or send us an enquiry.

In the next part of our series we will look at what events are deemed to be notifiable to the Pensions Regulator in relation to a DB scheme and how to handle them.


Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue please seek specific advice relevant to your particular circumstances. In particular, no responsibility shall be accepted by the authors or by Abbiss Cadres LLP for any losses occasioned by reliance on any content appearing on or accessible from this article. For further legal information click here.

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To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this article (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

The author

Gary Cullen
Pensions Law
D: +44 (0) 207 036 8398
T: +44 (0) 203 051 5711
F: +44 (0) 203 051 5712

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Key Pension Issues for Corporate Lawyers – Part 4
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Key Pensions Issues for Corporate Lawyers – Part 1
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