The Pensions Regulator

AbandonmentAbandonment of defined benefit pension schemes

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Nature and structure of new employer group and ultimate owners

36. An arrangement involving abandonment to a replacement employer is expected to involve a number of other parties to the deal. In concept, these can be defined as the replacement employer group and the ultimate owners of the replacement employer group.
37. The replacement employer group includes the replacement employer as defined in the scheme’s documents and any associated legal group. In some cases this may be a special purpose vehicle, the aim of which is to protect the ultimate owners of the replacement employer. For this purpose, the ultimate owners should be understood as the ultimate shareholders of, or providers of, capital to the legal group of which the replacement employer forms part.
38. The legal structure of the replacement employer group may be very complex and, if this is case, it is essential for the trustees to obtain independent advice to analyse and explain to them the implications of:
    • the legal domicile of companies within the group;
    • any restrictions or limits on capital and cash flows within the group, and the risk this creates in terms of preventing potential additional funds from being available to the scheme;
    • what additional funds, if any, exist within the replacement employer group that the scheme may have recourse to, either through a financial guarantee or other legal right;
    • what additional covenant, if any, is provided by the replacement employer group and whether the structure of the replacement employer group adds strength to the covenant of the replacement employer;
    • the effect on the existing employer; and
    • the role of any third-party provider. 
39. Trustees should also analyse the ultimate owners of the replacement employer group. In particular, trustees are encouraged to review:
    • the legal domicile of the ultimate owners;
    • the investment timeframe of the ultimate owners, covering the manner in which they will extract returns on any capital invested, and particularly whether they will wish to remain invested over the timeframes which the trustees need for their investment strategy – and if not, whether the ultimate owners are taking on any legal commitments to guarantee the scheme investments over the timeframe they will remain invested; and
    • the potential for the scheme to have access to additional funds from the ultimate owners, the aim being to establish whether there is any risk capital that the owners would legally be required to pay to the replacement employer and any commitment to improve the funding position of the scheme in defined circumstances.

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