Succession planning for family businesses – Pensions

A potential purchaser will want to understand the pension arrangements your business operates, and check that they have been properly managed.  Ensuring that your pension schemes are in order well in advance will help the sales process to go smoothly.  

Automatic enrolment

All businesses are now required to automatically enrol employees into a “qualifying pension scheme”. A potential purchaser will want to be sure that the automatic enrolment requirements have been complied with, so that there will be no risk of action by the Pensions Regulator (“tPR”).

We recommend ensuring that full records are available to potential purchasers, including details of:

  • The qualifying pension scheme and the “declaration of compliance” submitted to tPR;
  • any unusual arrangements (e.g. employees who may have different contribution rates);
  • employees who have opted out.

Generally, a business that only provides “money purchase” benefits won’t experience any issues relating to pensions on sale, as long as all records are present and up to date.

Defined benefit pensions

Many family-owned businesses historically operated “defined benefit” or “final salary” pension schemes, which made a promise to pay a certain level of pension - a promise which the employer must now stand behind.  Over the past couple of decades, these schemes have become increasingly expensive to provide, requiring ever higher contributions to fund the promised benefits.

The presence of a defined benefit pension scheme may be unappealing to many potential purchasers, and if not dealt with correctly could disrupt the sale process.  If your business is responsible for a defined benefit pension scheme, then you should start planning how it will be dealt with well in advance of any sale.

The first step is to ensure that you have taken any appropriate steps to manage the scheme’s liabilities, and have explored options such as pension increase exchange and flexible retirement options.  You should also ensure that the scheme doesn’t have any hidden “skeletons” such as a failure to equalise normal retirement ages, which might add to the liabilities.  Proper due diligence carried out as you prepare for sale can help to ensure that the process isn’t derailed by unknown issues coming to light.

The ideal route would be for the defined benefit pension scheme to be “bought out” (transferred to an insurance company) in advance of the sale, so that prospective buyers have the certainty of knowing that no further liability exists.  However, in some instances the funds to buyout the scheme may only exist on completion, in which case part of the sale proceeds may be put into an escrow account, which will be used to buyout the scheme after completion. Some potential purchasers may agree to acquire the business along with the pension scheme, but buyers willing to do so are rare, and the value of the sale will be negatively affected.

Our experienced pensions team can help you to review your pension arrangements in advance of a sale, please get in touch with me or a member of the team if you’d like to discuss any pensions issues.