UK: U.K. Pensions Issues on Sales and Acquisitions - Shares or Assets?

Pension liabilities in UK defined benefit (DB) pension plans have increased dramatically in recent years. Liabilities can be measured in many ways, but the ultimate liability is the cost of buying immediate deferred annuities for plan beneficiaries (the "buy-out" cost). This is the most expensive basis of calculating plan liabilities (much greater than the accounting liabilities under FRS17). Termination of a DB plan creates a debt that is immediately due from the plan sponsors on the buy-out basis. The potential financial strain on a business means that termination is no longer a viable option for most businesses.

On sales and acquisitions involving UK companies, pension liabilities have therefore risen to the top of the agenda. This commentary summarises the issues that may arise on a transaction involving a target with a DB pension plan in the UK and, in particular, the relative merits of a sale of the shares as opposed to the assets of the target company.

Share Sales

The sale of shares of a company which participates in a DB plan will raise significant problems for a potential buyer.

Ongoing Liabilities. If the target company is coming out of a group DB plan, the deficit in the plan in respect of the target’s employees (and former employees) becomes a debt due from the target company to the plan on closing. This deficit is calculated on the buy-out basis. The buyer would usually seek an adjustment to the purchase price for this cost, or an indemnity. This can be avoided only if the target company and the trustees enter into an "approved withdrawal arrangement" under which they agree that the buy-out cost will be paid into the plan over time by another party. The trustees’ fiduciary obligations to the plan mean that they are unlikely to agree to such an arrangement without also insisting on extra security for the plan in the form of an immediate substantial contribution to the plan or a parent company guarantee. Such agreement would then need the approval of the Pensions regulator, which usually takes around two months and must be obtained before closing the transaction.

If the DB plan is a target company plan only, the buyer will be assuming responsibility for the whole of the plan on closing. Whilst a share sale is attractive for the seller in these circumstances, buyers are wary of taking over the DB plan because of the funding obligations and also the new powers of the Pensions Regulator, which can extend obligations to contribute to the plan to group companies, substantial shareholders and directors if the Regulator feels that the plan sponsor is under-resourced or that action has been taken to limit the sponsor’s liabilities to contribute to the plan.

Notifications and Clearances from the Pensions Regulator. If the target company is being sold by a group company, the decision to sell must be reported to the Pensions Regulator (this means at the time the sale process is approved and not at the time of signing of the deed). The Regulator is unlikely to take any immediate action as a result of such notification, but it is in effect put on notice that there may be issues arising in relation to any DB plan of the target company.

If the DB plan is a target company plan only, the parties to the transaction may also seek clearance from the Pensions Regulator before the sale takes place that no liabilities to the plan will be triggered from the parties seeking clearance (usually the buyer and seller groups). Applications for clearance take time and often involve the Regulator demanding that additional funds be paid into the pension plan (usually by reference to a proportion of the purchase price). Clearance provides limited comfort for the seller, and comfort to all parties is limited to circumstances at the time of clearance.

Overall, the involvement of the Pensions Regulator clearly increases the time and costs involved in effecting a share sale transaction.

Asset Sales

Asset sales are becoming more popular where UK DB pension plans are involved because of the problems with share sales. There are, however, potential problems with asset sales relating to employee claims and the liabilities of the selling company.

Employee Claims. Generally, pension rights do not transfer on an asset sale, but the right to certain enhanced early retirement pensions do transfer ( e.g., on redundancy). If the DB plan in question provides such enhanced benefits, and these are not replicated by the buyer on transfer, there is the risk of employee claims which, in monetary terms, could be significant. The risk is usually quite remote, but because of the potential costs, the allocation of risk is important to both seller and buyer and is usually dealt with by way of indemnities.

Although occupational pension rights do not generally transfer on an asset sale, employees do have the right to certain levels of contribution into a new occupational pension plan or a stakeholder plan; there is no obligation for these contributions to be made into a new DB arrangement. This is nonetheless a cost that a buyer will have to factor into any asset sale arrangement.

Liabilities of Selling Company. If the selling company is the only employer under the DB plan, the termination of the plan is likely to be triggered by the asset sale, and the company will therefore be required to pay the deficit into the plan on the buy-out basis.

If the selling company is one of several employers in the DB plan, it will be obliged to pay the deficit into the plan on the buy-out basis unless it is able to enter into an approved withdrawal arrangement.

If a selling company retains part of its business, its immediate liability for the buy-out deficit to the DB plan may be avoided, irrespective of whether it is a target company plan or a group plan. However, this will be effective only if it is a bona fide continuation of the business of the selling company. The Pensions Regulator has substantial anti-avoidance powers which may be used to demand the buy-out deficit into the plan if such continuation is not bona fide.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.