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Occupational pension schemes and the “employer covenant” |
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David Glass of London based law firm Pritchard Englefield reviews the Pensions Acts in force in the UK
Since the pension scheme scandals of the 1980s when it was discovered
that pension schemes had been raided by a number of well-known
employers in order to prop up the finances of the employer companies,
some tough legislation has been passed in the United Kingdom to try and
ensure that employers and persons connected or associated with
employers are prevented from doing that sort of thing again. The two
principal Acts are the Pensions Acts 1995 and 2004.
The 1995 Act imposed in Section 75 a statutory liability on employers
to fund insolvent pension schemes. The 2004 Act reinforced this concept
by giving the Pensions Regulator the ability to issue “contribution
notices” and “financial support directions” in specified circumstances
to ensure that employers and connected or associated persons of
employers provide finance to failing occupational pension schemes in
specified circumstances. In addition, both those Acts have imposed much
greater liabilities on occupational pension scheme trustees with the
ability for the Pensions Regulator to intervene directly in the
removal, suspension and appointment of occupational pension schemes
trustees.
The so-called “employer covenant” (meaning in effect the duty of
employers to ensure that their occupational pension schemes are
properly funded) is now a phrase in common use in the business world
and has directly impacted on many prospective high-profile Mergers and
Acquisitions transactions where occupational pension schemes are
involved. A number of well-reported prospective deals have aborted
because purchasers have not been willing to inherit the “employer
covenant” where the associated occupational pension schemes have
significant deficits.
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GAAP level and
through IAS 19 at the international accounting standards level) have
highlighted the historic and current deficits of UK occupational
pension schemes.
There is some evidence that the combined shock tactics of UK
legislation and revised accounting standards have had their impact on
UK companies because recent reports have indicated that many of the
pension scheme deficits are now being successfully addressed.
The ageing population – the so-called “demographic time bomb” – which
affects not only the UK and Poland but also many other countries has
brought many new challenges in the field of pension schemes law but the
peculiar private public nature of UK pensions funding has highlighted
the need for close regulation of UK pension schemes.
The “employer covenant” and its consequences are here to stay.
© May 2007 David Glass
All Rights Reserved.
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