8 - Pensions

Summary

Introduction

In this chapter, we look at the complexities that arise where a transaction involves a UK pension scheme. The chapter begins by explaining some basic concepts and terminology relating to UK pension schemes. For practitioners who do not encounter issues surrounding pension schemes often, the different types of scheme and regulatory framework can be intimidating, but they must be appreciated so that the issues that arise where a pension scheme is involved can be properly understood and addressed with the minimum impact on cost and timetable.

The ‘moral hazard’ legislation is also explained in some detail, as this is frequently encountered and has significant implications in the private equity arena. The chapter concludes with an overview of the specific issues that arise in the context of private equity deals on acquisition, during ownership and on exit.

Key issues and principles

Types of pension scheme

There are two basic types of pension scheme:

1. (a) ‘Defined contribution’ schemes, where the contributions to be paid to the scheme by both the members (employees) and the employers are defined (typically, as a percentage of salary). A notional member's account is maintained for each member. The benefits provided are those which can be purchased (usually from an insurance company) with the member's account at the time the pension becomes payable. The member takes all of the risks, for example in relation to investment performance, inflation and annuity rates.

2. […]