Out-Law Analysis 4 min. read

Pension buy-outs: employer indemnities on winding-up

Company indemnities are usually granted as an adjunct to run-off and missing beneficiary insurance, instead of residual risk insurance, meaning that they will generally only apply where the insurance does not meet the claim.

The question of how favourable a company indemnity turns out to be for a trustee will largely depend on the trustee’s bargaining position. For example, a trustee might be able to exploit leverage at the point they are being asked to agree to full buy-in, or if there is a surplus upon wind up and the scheme’s rules give the trustee a say in the distribution of that surplus.

Stand-alone indemnity

It may be that the scheme’s rules contain an adequate company indemnity. It is arguable, however, that such indemnity is only applicable during the lifetime of the scheme. In these circumstances, the company might agree to confirm in the winding-up deed that the indemnity will continue after winding up.

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Alternatively, however, the company might agree to a stand-alone indemnity, to apply from wind up. It could be the case that the company is not willing to repeat – in the stand-alone indemnity – the indemnities contained in the scheme rules, to have a ‘clean break’ from its liabilities to the scheme.

For example, the scheme rules’ might indemnify all current and former trustees, and all former trustees and trustee directors, and their respective estates. But in the standalone indemnity the company might only be willing to give a personal indemnity to the current trustee directors and their estates, and to any others there have been in, for example, the six years prior to winding up.

Such a company will likely also wish to place a limit on the amount of indemnity cover it will be required, in aggregate, to provide. And possibly, a limit on the period over which the indemnity will remain in force. The reasonableness of both must be carefully considered by the trustee directors in conjunction with their advisers, in the context of any insurance that the trustee directors may also have the benefit of.

Inclusions and exclusions

What is included and what is excluded from the indemnity would also need to be carefully considered. The company will generally seek to exclude from the indemnity claims arising in respect of material matters that were not disclosed to the company before the indemnity took effect. Sometimes this is done by including in the indemnity deed a schedule that describes all of the material matters that are known to the trustee directors at a specified point in time, near to the winding-up date.

Generally, this is accompanied by a provision that, broadly speaking, says that the material matters schedule will be taken to include all material matters if the trustee made ‘reasonable enquiries’ of their advisers, or words to that effect. From the trustee directors’ point of view, it is important that the indemnity instrument should pin down what exactly constitutes ‘reasonable enquiries’ in order to avoid later disputes.

This can be done by appending to the indemnity deed draft letters: one from the trustee to their adviser, that provides the adviser with a draft schedule of the material matters known to the trustee, and that asks the adviser to search, in accordance with prescribed instructions, their records, and to tell the trustee of any material matter not on the draft; and the other from the adviser to the trustee, stating that the adviser has carried out said search and what the results of it are. The indemnity deed records that if an exchange of letters in substantially that form has taken place the trustee will be taken to have made ‘reasonable enquiries’ of their advisers as to material matters.

Claims-handling protocol

The company might wish to include in the indemnity a ‘claims-handling protocol’ that prescribes how an indemnified person will proceed in the event of a claim. This would be accompanied by a provision in the indemnity deed that the indemnity would not apply in relation to a claim to the extent that the insurer did not pay out because the indemnified person did not follow the claims protocol.

The company’s intention here would be to minimise the chances of the indemnity having to apply because insurance has failed. From the trustee director’s point of view, the claims-handling protocol should be drawn as tightly as possible to minimise the risk of their failing to comply with it.

Specified administrative support

Ideally, the indemnity instrument should include specified administrative support for the indemnified persons from the company, post-wind up, to provide a structure for them to deal with future claims. This could include retention by the company of scheme records, normally for a period of at least 15 years owing to limitation rules, and support in the mechanics of dealing with claims, such as managing insurance claims on behalf of the indemnified persons.

A company indemnity is, of course, only of value while the company exists and has assets available to meet calls on the indemnity. Accordingly, from the trustee’s point of view it is important that there should be provisions in the indemnity deed that place obligations on the indemnifying company as to what it must do if it transfers a majority of its business to another entity by way of a sale or transfer of assets.

Ideally, the trustee would want the indemnifying company to ensure that the successor, being of equivalent strength to the indemnifying company, will take over the indemnity, in the same terms. Often, however, this is weakened to using reasonable endeavours, as the company is generally anxious as to the effect of such a provision on future corporate transactions.     

Co-written by Andrew Wilso of Pinsent Masons.

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