Change is inevitable in the world of business. Whether a company is being sold, reconstructed, or amalgamated it is prudent to consider the effect such change in ownership may have on the company’s pension fund or the company’s participation in a group pension fund. Oftentimes the pension fund may be overlooked by an Employer when negotiating the details of a change in ownership.

Look back – have you considered the surplus

An important consideration is whether there is any entitlement of the company to surplus in the pension fund, and if so, whether such surplus entitlement will pass to the new owners. This has the potential to influence the cost of the transaction, the terms of any agreements and any decision to amend the constitutive documents of the pension fund. Consequently, this could be a key element in negotiations. 

Look forward – preserving your employees’ pension rights

One should also determine whether the pension fund or the company’s participation in a group fund will continue for those members employed by the company or whether it will be discontinued. Ideally, if a substantial number of the members will remain with the entity after change then the preservation of their pension rights is a goal for which to strive by ensuring the continuation of the pension fund (or in other cases the continued participation in a group pension fund). The decision to continue (or continue participation in) a pension fund will be influence by a number of factors which may include: 

• the provisions of the constitutive documents of the fund, that is, the Trust Deed and Rules
• the method by which change is achieved 
• possibility of substituting the new employer as sponsor of the fund

Provisions of the Trust Deed and Rules

The actions of the Trustees of the pension fund and the Employer are limited by the provisions of the Trust Deed and Rules. If the pension fund, or participation in a fund, is to continue then the Trust Deed and Rules would have to facilitate this. These documents usually outline the criteria for participation of a company in a pension fund, circumstances in which the pension fund or participation in same may terminate, and instances in which the pension fund can continue where there is a change in ownership of the Employer company.  

Method by which change is achieved

Change in ownership can occur through a sale of shares, or sale of the company’s business. Depending on the method by which change is achieved, the pension fund or participation in a pension fund may automatically continue. Otherwise, an agreement between relevant parties may be required to achieve a seamless transition.  

Substituting the new employer as sponsor of the fund

Where a company has a pension fund for its employees it is called the sponsor of the fund. Depending on the provisions of the trust deed and rules, the new employer company may be able to take the place of the old employer, thereby assume the role of sponsor. Case law has shown however that substitution is dependent on the type of business the new employer intends to operate and the workforce it will employ. If substitution is possible, continuation of the pension fund may be achieved.  

Do you still wish to sign? 

It is essential that Employers assess the consequences which a change in ownership will have on their pension fund or their participation in a group fund and receive adequate legal guidance before making a decision. Think again! A second thought could result in a win-win situation for both the Employer, who seeks the best deal, and their Employees who need to save for retirement.