Intra-group secondments and pension liabilities

Däna Burstow

Intra-group secondment arrangements could give rise to a liability to contribute to a deficit in a defined benefit pension scheme – that’s the (possibly surprising) conclusion of a recent Court of Appeal ruling.

In this case, an operating company had to indemnify an intra-group service company for its exit debt (that is, its full buy out when it ceased to have active members in the pension scheme, also known as a section 75 debt). Although there was no written agreement specifying it, the Court held that there was an implied contractual obligation that the operating company would pay all costs (including aggregate pension costs) in relation to the seconded staff. That was held to include the full buy out debt, not just the ongoing costs.

The fact that additional group companies may have to make payments to a group pension scheme as a result of having secondment arrangements in place will be relevant for those companies. However it will also be relevant for trustees when they think about which companies must support the scheme. We are not aware of this issue having been considered previously by the courts – the Court of Appeal noted that it was a ‘significant step’ to imply a contract here, but that it was necessary in the commercial context (approximately USD330m was recharged each year). It’s an area where some internal housekeeping could help to ensure that parties are not subject to unexpected liabilities. It’s also relevant to due diligence exercises in preparation for corporate activity or lending.

Assessing your position

An audit of internal group arrangements can help you clarify the position. The starting point will be to identify current and past intra-group secondments and the terms of any written agreement between the relevant parties. For example:

If there is a written agreement:

  • Are costs paid on the basis of a fixed fee, or by reference to ‘all costs’? Is there any reference to liability for pension contributions and if so, how widely is this expressed?
  • What has the practice of the parties been in relation to the payment of secondment and specifically pension-related costs – does this differ from the written agreement?
  • How are the secondment arrangements/payments described in the accounts of the operating companies? Is the amount recharged reasonable for the services provided?

If there is no written agreement between the parties:

  • How long has the arrangement been in place and what do the parties think it means?
  • Is there any other evidence of the terms of the arrangement, for example as agreed by a parent company?
  • What has actually happened about the payment of secondment and specifically pension-related costs?
  • How are the secondment arrangements/payments described in the accounts of the operating companies? Is the amount recharged reasonable for the services provided?

A note of caution…

It’s worth noting that intra-group secondments have previously been a factor in the Regulator’s considerations in relation to the use of its moral hazard powers. In its 2010 financial support direction determination in relation to Lehman Brothers, the Determinations Panel said that ‘it is highly relevant to whether it is reasonable to issue an FSD that employers who take the benefit of employees should also ultimately take the burden of their pension promises’ – subject, of course, to other relevant factors and the overriding consideration of reasonableness. However, in normal circumstances, express agreement between the parties should help to clarify the section 75 position.

Can we help?

Our pensions and employment experts can help you with the analysis, and with putting in place or clarifying written arrangements. If you would like help, or to discuss the issues further, please get in touch with your usual Allen & Overy adviser.

Däna Burstow is a partner at Allen & Overy LLP.

 

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

Read comments below or add a comment

Leave a comment

Your email address will not be published. Required fields are marked *