The Actuary in the Room: Pension Debt and the Board Pack for a Subsidiary Sale

When a UK group resolves to sell a subsidiary, the board pack fills quickly. Trading performance, working capital, the warranty schedule and the tax deed all arrive on schedule. Pensions tend to arrive last, and when they do, they arrive with an actuary attached and a set of figures that nobody in the deal team particularly wants to own.

The reason is structural rather than cultural. A defined benefit (DB) scheme is a separate legal trust with its own trustees, its own statutory funding obligation and its own view of time. The sale timetable is measured in weeks; the scheme's valuation cycle is measured in years. Reconciling the two is a governance task, not an administrative one.

The covenant moves even when the employer does not

In a share sale, the employing company remains the same legal entity after completion. Its name on the scheme's employer schedule does not change, its employees stay in the scheme, and no employer debt is triggered by the transaction itself. It is tempting to conclude, therefore, that nothing has happened.

Something has happened. The covenant standing behind the employer has changed, potentially beyond recognition. The trustees previously looked to a group with a particular balance sheet, particular banking arrangements and a particular willingness to support the scheme. They now look to a new owner whose intentions may be entirely honourable and entirely different. For a scheme carrying a funding deficit and a recovery plan with several years to run, that shift is a risk event whether or not it appears in any statutory trigger.

In an asset sale the position is sharper still. If the transferring entity ceases to employ active members in a multi-employer scheme, or is wound up, the employer debt machinery engages directly. The commercial shape of the transaction determines which of these two regimes applies, and the distinction should be settled early rather than discovered in the disclosure bundle.

Section 75 and the arithmetic nobody enjoys

The employer debt under section 75 of the Pensions Act 1995 is calculated on a basis prescribed by regulation, generally reflecting the estimated cost of securing accrued benefits with an insurer. That buy-out figure can sit a long way above the funding deficit reported in the scheme's actuarial valuation, which is calculated on assumptions about future investment returns and continuing employer support. Boards that have only ever seen the valuation figure are often surprised by the gap.

Where the debt falls due, there are mechanisms that can soften the timing. Withdrawal arrangements, flexible apportionment arrangements and scheme apportionment can defer or redistribute liability, but all of them require trustee agreement and all of them are contractual commitments with conditions attached. They are negotiated outcomes, not elections. A group that assumes it can simply apportion its way out of a deficit has not read the scheme rules.

The related concept of last-man standing deserves particular attention in a group with several participating employers. Where the scheme rules provide for it, the departure of one employer can leave the remaining employers carrying the whole of the liability. Selling a subsidiary can therefore increase the exposure of the entities that stay behind — an outcome that is rarely popular once the finance director sees it.

Where parental comfort becomes a balance sheet item

Group support for a DB scheme is often informal in appearance and formal in effect. A parent company guarantee, a charge over property, an escrow arrangement or a letter of comfort given years ago may sit quietly in the scheme's contingent asset register until a transaction brings it into focus.

Two consequences follow. First, the guarantee may be called upon or renegotiated as part of the sale, and the trustees are not signatories to the sale and purchase agreement — they are not bound by its allocation of risk. Second, the guarantee is likely to be disclosable in the group's own accounts, and the interaction of accounting standards with a scheme surplus or deficit is not always intuitive. A parent that has been treating its pension obligations as a subsidiary matter may find that a transaction converts them into a group-level disclosure item at precisely the wrong moment in the reporting cycle.

Banking covenants deserve a parallel check. An employer debt that crystallises as a cash call has a habit of arriving in the same quarter as a leverage test.

The regulator's interest outlives completion

The Pensions Regulator has a statutory objective to protect scheme members and the Pension Protection Fund, and its moral hazard powers do not stop at the completion date. Contribution notices and financial support directions can reach parent companies and connected persons. The clearance procedure exists precisely so that parties to a transaction can obtain certainty in advance on defined events, including the sale of a controlling interest in a scheme employer where the scheme has a deficit.

Clearance is voluntary. Declining to seek it is a legitimate decision, but it should be a documented one, with the reasoning recorded in the minutes and the legal advice retained on file. Since the Pension Schemes Act 2021, the consequences of getting this wrong have become more serious: avoidance of employer debt and conduct risking accrued scheme benefits now sit within a criminal framework, alongside substantially increased civil penalties. The notifiable events regime has also been broadened, and the direction of travel points towards earlier engagement rather than later.

Questions that surface after heads of terms are signed

Most of the difficult pension questions are knowable at the start of a process and are simply not asked until the timetable is tight. A workable list includes: which scheme or schemes the target participates in; whether it is an employer in its own right or a participating employer under a group arrangement; the date and basis of the last actuarial valuation; the remaining term of the recovery plan; whether the scheme rules contain last-man-standing provisions; what contingent assets exist and who granted them; and what the trustees' stated position is on the transaction.

Beyond those, the board should understand the buyer's covenant and whether any indemnity in the sale agreement is likely to be enforceable in practice. An indemnity from a special purpose vehicle is not the same as an indemnity from a balance sheet.

The file a board should be able to produce

A group that handles this well tends to keep a single pension file for each transaction: the scheme summary, the employer status, correspondence with the trustees, an estimate of the debt on more than one basis, legal advice on the applicable regime, minutes recording the board's consideration of the options, the clearance decision and its rationale, and a note of who owns the trustee relationship after completion.

Pensions are not a diligence appendix. They are a governance item with a long tail, and the least expensive moment to deal with them is before the signature page is reached.