Pensions Pitfalls When Investing in the UK
1.1 Private pensions in the UK can be ‘defined benefit’ or ‘defined contribution’. An investor in a UK business needs to take particular care to understand which type of pension arrangement is provided in respect of the employees of a target investment. Obligations can range from the requirement to provide a minimum level of pension through to liability for historic pension arrangements Defined benefit pension schemes, in particular, can result in significant hidden costs and risk..
1.2 Regulations require defined benefit pension schemes to be funded to a certain level. Just under half of all defined benefit schemes were in deficit as at 31 March 2021, with an aggregate deficit of £129 billion. A scheme in deficit can result in significant cost to the sponsoring employer and consequently can affect the value of any investment.
1.3 Additionally, the UK Pensions Regulator has extensive powers to take action where it considers that any corporate activity might adversely affect the ability of an employer to fund its defined benefit pension scheme. From 1 April 2022, certain types of transactions must be notified in advance to the Regulator.
2 Contribution notices
The UK Pensions Regulator has the power to require a person that is (or has been) connected with a pension scheme employer to make a contribution to that employer’s pension scheme, up to the full amount of any deficit in the scheme.
Failure to pay an amount due under a contribution notice could result in a criminal penalty of an unlimited fine or a financial penalty of up to £1 million.
3 Criminal Sanctions
Anybody involved with the running of a defined benefit pension scheme or the operation of an employer (e.g. company director or investor) could also be caught by the two offences of ‘avoidance of an employer debt’ and ‘conduct risking accrued scheme benefits’ if they do not have a reasonable excuse for their actions. The offences are not limited to those who are connected with a pension scheme employer, in the way that a contribution notice is. The UK Pensions Regulator can impose (1) a criminal penalty of up to seven years in prison or an unlimited fine or (2) a financial penalty (not criminal) of up to £1 million.
The pensions aspects of M&A activity can be tricky and could result in significant unexpected costs for an investor. Even the basics can attract penalties for non-compliance. In the six months ended 30 June 2021, the UK Pensions Regulator issued over 22,000 fixed penalty notices for non-compliance with the requirement to provide a minimum level of pension for employees.
Squire Patton Boggs is a global law firm with award-winning pensions expertise and experience in advising on international transactions. We advise more than 500 clients with over £400 billion of pension assets. We also offer an online tool called Global Edge, which compares the employment law implications of investing in 40 different countries globally.
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