We are purchasing another company and need your advice on dealing with its pension and benefit schemes.
As you have discussed with your solicitors, it has now been established that pensions are not covered by the Transfer of Undertaking Protection of Employment Regulations. This means you do not necessarily have to continue with similar or, indeed, any pension arrangements when you purchase this new company. There has not yet been any case law regarding life insurance benefits and it is generally felt appropriate that these should be maintained.
Although there are no specific rules on continuing pension benefits, in the interests of employee moral and to avoid a potential case for constructive dismissal, we believe that maintaining a pension arrangement is preferable.
The company you are buying offers life insurance cover of one times salary to all staff, with senior staff being offered four times salary. Under your own arrangements, senior staff also receive four times salary cover but other staff are covered for twice the salary.
The rate that is paid by the other company is only fractionally higher than your own and, therefore, for a marginal increase in cost, you would be able to provide twice-salary death benefits for all the new employees. This increased benefit would be positive and would bring the employees' death benefits into line, which is something you have confirmed is desirable.
Details of the employees have been sent to your group life insurer and it will confirm details on being able to accept risk when the final sale and purchase is completed.
Turning to pension arrangements, it appears the other company has been running a contracted-in money-purchase arrangement. There is an employer contribution of 4 per cent of salary and employees are required to pay 2 per cent.
As you are aware, your own pension arrangement is based on a group personal pension set up with charges to mirror the stakeholder pension regime. You could, of course, allow the new company to continue to run its existing scheme but your preference is to amalgamate the arrangements as much as possible to simplify administration. This removes the need for trusteeship and to have contributions audited.
We have, therefore, agreed that employees of the other company will be offered a chance to join the group personal pension arrangement but contribution rates will be maintained at 2 per cent from the employee and 4 per cent from the employer. This is slightly different to the rates applied to your own staff so a separate category within the scheme will need to be created.
As the members will be moving to the personal pension regime from an occupational pension, there will be some technical changes to their benefits and to the way their contributions are collected. They will move from paying a gross contribution from gross pay to paying net of basic-rate tax from net pay. The system is effectively the same although immediate tax relief is not available for higher-rate taxpayers.
Both types of pension are effectively money purchase in that they both build up funds which are used at retirement to purchase benefits. Under the other company's money-purchase scheme, tax-free cash will be based on salary and service and can be anything up to 100 per cent of the fund, whereas under a personal pension the maximum tax-free lump sum is 25 per cent of the fund.
Under the occupational rules, a pension with limited index-linking has to be bought under the personal pension arrangement where employees can choose from a range of options.
We can explain these changes and the benefit of the increased life insurance cover in a presentation to the employees. They may feel that starting a new pension scheme will disadvantage them as they may have to pay further setting-up costs. As your scheme has the single annual management charge with no other initial costs, this is in fact not the case.
In due course, all members of the scheme would have the option either to leave their funds with the existing insurance company under the money-purchase arrangement, possibly with the funds being transferred into individual earmarked policies in their own name, or to transfer the values into the group personal pension arrangement. Again, if necessary, we can provide additional advice to the members.