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Webcast: The Joys of Parenting – How Not To GetHurt By Your UK Pension Scheme
21 September 2006
Presented by ACC’s International Legal AffairsCommittee and sponsored by Eversheds LLP
Association of Corporate Counselwww.acca.com
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Presenter:
Liz Fallon, Partner, Eversheds LLP
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I will be talking about...
The Pensions Act 2004Financial Reporting Standard 17
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The Pensions Act 2004 from April 6, 2005
The Pension Protection Fund (like PBGC)The Pensions Regulator
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Financial Reporting Standard 17FRS17 replaces SSAP 24
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The Pensions Act 2004impact on corporate transactionsmoral hazardmore onerous funding obligation
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Funding BasesOLD : MFRNEW: scheme specific funding requirementNEW: buy-out
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Scheme Specific Funding“sufficient and appropriate assets to cover itstechnical provisions”“the amount required on an actuarialcalculation to make provision for thescheme’s liabilities”trustees and employer agree contribution rate
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Significance of buy-out?Section 75 Pensions Act 2004
winding upwhen one of the employers leaves
Too expensive to walk away!But possibly a withdrawal arrangement
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Moral Hazard
subsidiary leaves/restructuringpayment due – full buy-outunless other financial support in place
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Powers of the Pensions RegulatorContribution Notice
act or omission with main purpose toprevent recovery of section 75 debt, orprevent debt arisingor compromise amount of debt
Good faith
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Contribution Noticecompany restructured – one active schememember left behindtwo schemes merge leaving one scheme anempty shell to wind uprunning scheme as a closed scheme ratherthan winding up
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Contribution Noticeamount of section 75 debtto be paid by:
participating employer, orparty “associated/connected” with it
joint and several liabilitycan cover individuals
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Contribution Noticecould cover a US company but remember
good faith testRegulator obligation to be reasonable
level of involvement of that partyrelationship with employerinvolvement with pension schemefinancial circumstances
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Contribution Noticeapply to acts or omissions post April 27 2004issue up to six years after act/omissionRegulator power to issue against overseascorporate entitiesnone issued yet
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Financial Support Directionwhere
participating employer is service company, orinsufficiently resourced (i.e. resources less than50% of s75 debt)no requirement for “fault”reasonableness
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Financial Support Directionagainst
participating employeror “connected” or “associated” partynot individuals unless individual is employer
failure to comply could result in a ContributionNotice
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Financial Support Directionthat party’s level of involvement with Schemebenefit that person has received from theemployer
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“Connected with”/”associated to”UK insolvency legislationConnected means: director; shadow directoror associate of eitherAssociate means: husband or wife; relativeincluding ex-spouse; company controllinganother; both companies controlled by sameperson; or one company controlled by anindividual whose associate controls another
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“Connected with”/”associated to”concerns for
British Venture CapitalistsOverseas parent companies
easier to enforce against some than others
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Clearancemergers and acquisitionsrestructuringspecial dividendsshare buy-backs
no problem if no deficit under FRS17
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ClearancePension scheme unsecured creditor“Type A” events affect the scheme
change in priority of pension creditorreturn of capitalchange of control
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Clearancevoluntarymay be conditionalcircumstances remain materially the same
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The Implications?delay in corporate transactionSection 75 debt – affects value of companyfor salebuyer may inherit risk of Contribution Noticeor Financial Support Directionpost acquisition planswarranties and indemnitiesinvolvement of pension trustees
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Enforcement against UScorporations
power to issueenforcementjurisdictional issuesRegulator “limited” powerseasier within the European Unioncontractual obligation of foreign parentreputational issuesno Contribution Notices of Financial Support Directions yet...
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Notifiable Eventsearly warning system for the Regulator
trustee – scheme related eventsemployer – employer related eventsnotification mandatory – unlike clearance
notification mandatory – unlike clearance
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Employer-related Notifiable Eventsalways report if
scheme funding less than 100% of PensionProtection Fund (PBGC) buy out level; oremployer failed to pay contribution within thelast 12 months
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Notifiable events – May need toreport
breach of banking covenant not waiveddecision to relinquish control2 or more changes CEO/FD or otherdirector responsible for financial affairschange in employer credit rating other thanfrom investment to sub-investment grade
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Notifiable Events – Always reportdecision to take action to compromise debtdue to schemedecision to cease trading in the UKconviction for dishonesty of directorchange in employer’s credit rating
more may be added…
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Notifiable Eventsunderstand the listprocedures to trigger notificationallocate responsibilitytrack new additions to list
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Accounting for pension costs –FRS17 – effective since 2005
SSAP 24investment portfoliosurplus/deficit – spreadcost of benefitimprovements spread
FRS 17AA bond yieldsno spreadingfull cost of benefitimprovements shown
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Impact of FRS17volatile resultsassets and liabilities unlikely to move in tandemdisincentive to offer benefit improvementsinvestors will be lookingimpact on share price/dividendsimpact on investment strategyclosure of schemes
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What about IAS 19International Financial Reporting StandardsJanuary 1, 2006EU listed companies
consistent measurement across the world
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So next time your harassed UK FD rings upand nervously asks for a word about thecompany’s pension plan…
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Thanks for listeningPlease contact me if you have any further queries
Liz FallonPartner, Eversheds LLPEmail: [email protected]: 00 44 845 497 1496Cell: 00 44 7768 304452Fax: 00 44 121 232 1928
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