Winding Up

The winding-up of a company pension scheme normally occurs when the company decides it no longer wishes to make the required level of contribution to the scheme (for example on the grounds of cost) or is no longer able to do so (it may, for example, be insolvent). The merger or take over of companies is another common reason for pension schemes to wind-up.

A date is set (often referred to as the wind-up date) after which members no longer earn benefits under the scheme. The scheme rules may sometimes dictate that a period of notice has to be given to members of the wind-up date.

The trustees of the scheme will then make a detailed assessment of the scheme's assets and liabilities. (Most pension schemes have trustees whose duty is to look after the interest of scheme members whilst acting strictly in accordance with the scheme rules). The scheme rules will have detailed provisions dealing with the winding up of the scheme, and the way that its' assets should be distributed.

Company Insolvency

If an employer becomes insolvent, it is likely that an insolvency practitioner is appointed to act in place of the employer. Where this takes place, the insolvency practitioner needs to notify the Pensions Regulator, who have statutory power to appoint an 'Independent' Trustee. This happens where the scheme is set up on a final salary or career average scheme basis.

The Independent Trustee will usually be a company rather than an individual and is charged with ensuring all members' interests are fully protected during the winding-up period. Independent Trustees should write to members within two months of their appointment advising members that they are in place.

The existing Trustees should carry out their existing duties, but any discretionary powers now rest solely with the Independent Trustee.

The Independent Trustee is there to help the members and should answer any reasonable requests for information. Members should bear in mind however that the fees of an Independent Trustee are taken from the assets of the scheme. The section 'Information during the Winding up Period' below gives details of the information members should receive automatically from the Independent Trustee.

If there is no requirement for an Independent Trustee, the scheme would almost always be set up on a money purchase basis. In this situation, the existing trustees continue in place and it is their responsibility to wind up the scheme in accordance with its' rules.

As occupational pension schemes are set up under trust, its assets are protected from an employer's creditors unless the employer has contributed to the scheme whilst insolvent. However, a trust cannot protect the value of the investments. Therefore if part of the assets are invested in the employer's business, and the employer then becomes insolvent, the trust does not protect the market value.

Information during the Winding-Up Period

When a scheme is being wound-up, the trustees must issue a notice to inform all members and beneficiaries (except deferred pensioners who cannot be traced) in writing within one month of the winding-up having commenced.

In addition, this notice must:

• Give the reasons the scheme is being wound up;
• Give a statement to active members on whether death benefits will continue to be provided;
• Inform members, if relevant, that an Independent Trustee has been appointed; and
• Supply a name and address for further enquires.

The trustees also need to issue a progress report to members at least every 12 months thereafter.

These subsequent reports must give details of:

• Action being taken to establish the scheme's assets and liabilities;
• Action being taken to recover any assets not immediately available;
• The estimated date when final details of members' benefits are likely to be known; and
• The extent (if any) to which the value of the member's benefits is likely to be reduced (if relevant and the trustees have sufficient information to state this).

The Winding-up Process

The winding up of a company pension scheme is a very lengthy process and can take a number of years to complete. Most scheme wind ups take at least 18 months, and it has been known for them to take over 10 years (for more details, see section below entitled 'Supervision').

The first part of the winding up process normally consists of the Trustees checking the accuracy of the scheme data. Sometimes this can take a considerable time. The Trustees need to take steps to ensure they do not overlook any members' benefit claims, which are not obvious. These tasks are more difficult when the schemes' data records have not been kept properly, which can often occur where the employer becomes insolvent.

The Trustees have to make an assessment of the value of scheme's assets, and compare this to the level of benefits (or liabilities) it has to pay. In a final salary or career average scheme, this ratio is often referred to as the scheme's funding level. Each member's entitlement must be calculated according to the scheme rules.

The Trustees also have to realise the scheme assets. This means they have to sell any investments the scheme may own. This can be difficult in certain circumstances, for example if the scheme owns property and needs to sell at a time when the market is low. The Trustees would normally put the proceeds in low risk investments (such as a bank deposit account or government bonds) to protect their value.

It may be possible for the receiver or liquidator of a company to claim from the State redundancy fund any contributions, which were not paid in the last 12 months of the company's existence. To do this, certain checks have to be made and certificates provided.

If any shortfall in funding is due to fraud or theft, it may be possible to recover some of the money from the Pensions Compensation Board.

Members who reach their retirement age during the winding up period may not receive their full benefit entitlement, if the trustees have not completed their calculations of the scheme's funding level.

Reasons for Delay

Excessive delay in finalising a scheme wind-up is one of the most common complaints we receive. Aside from problems with data and records referred to above, there can be a number of other legitimate reasons for delays in the winding-up of a scheme:

Guaranteed Minimum Pensions (GMPs) - If the scheme was contracted-out of the second part of the State Earnings Related Pension Scheme (SERPS), it may have to provide certain minimum levels of pension benefit, which have to be agreed with the Inland Revenue.

Trusteeship - There may be delays in the appointment of an Independent Trustee (where this is required).

Scheme Rules - There may be a dispute over interpretation of the scheme rules, or the rules may be inadequate. The trustees (after taking advice) may need to go to court or approach The Pensions Regulator (TPR), or the Pensions Ombudsman, for clarification.

Other disputes - The Trustees may have to resolve other issues, for example disputes with individual members.

Tracing members - The Trustees need to take action to trace those members for whom they do not hold an accurate address.

Surplus/deficit - Either may exist in final salary and career average schemes. Both can create (different) problems causing delay. These subjects are covered in more detail below.

Equalisation - particularly the issue of how to equalise Guaranteed Minimum Pension (GMPs) is not resolved. If your scheme was contracted-out of the State Earnings Related Pension Scheme (SERPS) before 6 April 1997, then part of your benefit would be in respect of a GMP. A GMP is broadly equivalent to the benefit you would have accrued under SERPS had you not been contracted-out.

Since 17 May 1990 benefits under occupational pension schemes should be equalised. This means that benefits are paid on equal terms for men and women. Schemes are obliged by law to have equalised benefits. It is argued that GMPs are not equal in that they are payable at different ages for men and women.

No separate guidance on how to equalise GMPs has been given and the issue is shrouded with uncertainty. There is currently no definitive ruling on this issue and some pension scheme trustees believe they are unable to properly wind up their scheme until it is resolved. Unless the government intervenes, this is likely to require a court case.

Over-cautious trustee - the trustee may be seeking legal advice on all matters. The winding up of a pension scheme can be complex and whilst it is natural for trustees to try to ensure they are following the scheme rules correctly (and taking into account any relevant legislation), some trustees are more cautious than others.

Other delays - these can be caused by the scheme's trustees, administrators, actuary, employer, or solicitors (amongst others). Delays can and do happen. There may be a number of reasons for this, for example the administrators may pass on incomplete membership data to the actuary which in turn would mean that a member's benefit calculation would be delayed.

Complaints about undue delay may be taken to the Pensions Ombudsman, but for the complaint to be successful, the member will need to show they have suffered financial loss as a result of the delay.

Members Benefit Options

On wind-up each member's entitlement is calculated according to the scheme rules. The trustees calculate the transfer value of the entitlement of each member who has not yet retired and the cost of securing immediate annuities for those that have. Once they know the total cost of this, trustees can then determine if there is enough money in the scheme. If there is more than enough money, they have a surplus - if there is less than they need, they have a deficit.

The aim is to secure all members' benefits through the purchase of immediate or deferred annuities or to transfer benefit entitlements to a scheme of the members' choice able to accept it.

Members may transfer their benefits to an alternative pension arrangement such as a stakeholder pension or personal pension plan. For those members who have since left employment it may be possible to transfer the benefit to their new employer's pension scheme. Independent financial advice may be crucial in ensuring you make the right choice at this time.

HMRC will allow a refund of members' own contributions only to members with less than two years service. Otherwise the benefits provided should be in pension form (except to the extent that any lump sum is permitted).

The trustees can and usually do buy an assurance policy or annuity from an insurance company for all the remaining scheme members. (However, for members who have not yet reached retirement they can transfer to another pension arrangement if they so wish as outlined above.) This is called a bulk buy-out. Where a scheme is insured with a particular insurer it may be possible to secure enhanced annuity terms with that insurer.

The benefits for members who have not yet retired are normally in the form of non profit deferred annuities which mean that they do not increase (beyond any statutory requirement) and become payable some time in the future (usually the scheme's normal retirement date).

For pensioners immediate annuities are purchased.

Triviality (Cashing-in a Pension)

If the member's benefit value is less than 1% of the lifetime allowance for that tax year (i.e. less than £18,000 for 2011/12) the member may be able to take a 'winding-up' lump sum.

It is not necessary to take into account any benefits held within other schemes, but:

• The employer (or former employer) who paid contributions to the scheme in respect of the member cannot make contributions to any other registered pension scheme in respect of the member.
• Such an employer (or former employer) must undertake to HM Revenue and Customs (HMRC) not to make any contribution to another pension scheme in respect of the member for at least 12 months after the winding-up lump sum is paid. (NB. If the employer is no longer in existence, HMRC will treat this undertaking as already having been complied with).

Click here to read more about triviality.    

Surplus

Trust Deeds usually provide for how surplus assets should be dealt with and it is common to see a provision that extra benefits may be provided for the members. It will usually be at the trustees' discretion whether and how far to do this, but the employer's consent is sometimes required.

Depending on the scheme rules, trustees may have to give back some of any surplus to the company (even when it is insolvent).

Sometimes, the trustees will have discretion over the use of any surplus and will probably take professional advice before deciding what to do with it. Disputes over the distribution of surplus can delay wind-ups considerably.

Since April 1997 scheme members have to be advised by the trustees of what steps are being proposed to reduce or eliminate a scheme surplus. Members have to be invited to comment on such proposals before a final decision is taken. Three months before such final decision is due to be implemented, members must be advised of the arrangements and informed that they may make written representations to The Pensions Regulator (TPR).

It should be noted that benefits can be increased up to Inland Revenue limits only and there may still be a surplus after this has been done. This may be paid back to the employer less tax. If the rules of the scheme do not allow for the payment of surplus to the employer, they can apply to TPR for a modification order to try to have the rules changed to allow this.

Deficits in Scheme Funding

Under a final salary or career average scheme where the scheme's liabilities exceed its assets, the shortfall becomes a debt owed by the employer to the trustees of the scheme.

The current position can be split into four situations:

• Where the company is solvent and started to wind up the scheme before 11 June 2003, the debt is calculated on the basis of providing immediate annuities for scheme pensioners and transfer values for active members and deferred pensioners. Even where the debt is recovered, the value of the benefits of those members who have not yet reached retirement age is based upon their transfer value, and this means that they will not receive their full promised pension benefit. If the transfer value was to be paid to an insurance company to buy an amount of deferred pension, that amount may normally vary from 40% to 80% of the member's full pension entitlement. The younger the scheme member, the greater the percentage reduction.
• Where the company is solvent and started to wind up the scheme on or after 11 June 2003, the debt is determined by valuing the benefits on the basis that they are bought out in full via immediate annuities (for pensioners) or deferred annuities (for non-pensioners).
• If the company is insolvent when the scheme starts to wind up, the trustees' claims have to rank equally with all other non-preferential and unsecured creditors, so any recovery of the debt is highly unlikely.
• If the company becomes insolvent after 6 April 2005 and starts to wind up the scheme because of this members may be eligible to receive compensation from the Pension Protection Fund.

There are some measures the trustees can take to reduce the debt, other than relying on the company.

A claim may be made to the State redundancy fund in respect of relevant contributions due, but unpaid, by an insolvent employer. Relevant contributions are those due in the 12 months prior to the date of insolvency subject, in the case of an employer's contributions, to a maximum amount equal to 10% of wages paid, or payable, to members during that period.

If the shortfall in the scheme assets is due to fraud or theft, it may be possible to recover some of the money from the Fraud Compensation Fund.

If the company became insolvent before 6 April 2005 but after 1 January 1997 and the trustees started to wind-up the scheme because of this, the Financial Assistance Scheme (FAS) established by the Government on 14 May 2004 will provide some assistance to those members with little or no pension. The FAS currently makes payments to top up scheme benefits to 80 per cent of expected core pension (subject to a cap of £26,000) to eligible members of schemes that are winding up or have wound up from age 65.  The Government recently announced extensions to the scheme - see Financial Assistance Scheme.

Once the assets have been applied in accordance with the legislative requirements, members and beneficiaries (except deferred pensioners who cannot be traced) must be told their benefit entitlements within 3 months, together with details as to who is responsible for paying these benefits and the extent to which any benefits were reduced because the assets were insufficient.

Compromising the Debt

If, in scenarios (a) or (b) in the 'Deficit in Scheme Funding' section above, the company is unable to cover the cost of buying out the required benefits, the trustees may agree to come to a deal with the employer on how much of a contribution to accept. This principle was agreed by the Courts in the Bradstock case, where the trustees wanted to accept a lower contribution from the company than was required to secure the minimum benefits, rather than making the company insolvent by requesting the full amount, and thus risk receiving much less.

Before entering into a compromise deal with the company, the trustees must take appropriate independent expert advice. This is likely to include legal, actuarial and accountancy advice. In most cases the cost of any investigations involved are paid by the company.

If the majority of the trustees are senior officers of the company, it would be best if an independent trustee is appointed to carry out the negotiations with the company. If scheme members believe that the trustees are not operating in the best interests of the scheme members on this matter, they can approach TPR who have the power to appoint an independent trustee to oversee any negotiations involved.

Any agreement to compromise the statutory debt should be reported, by both the employer and the trustees, to the TPR.

Priority of Distribution

The order of priority used differs depending on whether the winding up started:

• before 6 April 1997
• after 6 April 1997 but before 10 May 2004
• after 10 May 2004 but before 6 April 2005 or
• after 6 April 2005.

For schemes where the winding up process started prior to April 1997, the rules of the scheme dictate the priority order. Usually, all pensioners' benefits (including increases) receive a high priority.

For schemes where the winding up started after April 1997 but before 10 May 2004, the order of priority is laid down in legislation. In this latter case the order of priority is as follows:

1. pensions and other benefits bought by additional voluntary contributions;
2. pensions and other benefits already payable and secured before 6 April 1997 by insurance policies, including contingent benefits but excluding increases;
3. pensions and other benefits already payable but not covered by 2), including contingent benefits but excluding increases;
4. contracted-out rights, excluding increases and refunds of contributions for members with less than two years' pensionable service and no accrued rights;
5. pension increases on benefits in categories 2) and 3) above;
6. pension increases on benefits in category 4) above;
7. other accrued benefits including pension increases.

The order of priority for schemes where the winding up started after 10 May 2004 but before 6 April 2005, is as follows:

1. Pensions and other benefits bought by additional voluntary contributions;
2. Pensions or benefits paid by insurance contracts purchased before April 1997, but excluding increases;
3. Other benefits in payment but excluding increases;
4. Any other benefits which have accrued;
5. Pension increases on benefits which are in payment;
6. Pension increases on other benefits.

The order of priority for schemes where the winding-up started after 6 April 2005, is as follows:

1. Pensions and other benefits already payable and secured before 6 April 1997 by insurance policies, including contingent benefits and pension increases, which cannot be surrendered.
2. Pension and other benefits but not exceeding the benefits that the Pension Protection Fund would pay to those members whose employer becomes insolvent.
3. Pensions and other benefits bought by additional voluntary contributions.
4. Other accrued benefits including pension increases.

Supervision

Legislation designed to speed up the winding up process for occupational pension schemes came into force on 1 April 2002.

From 1 April 2002 the trustees of occupational pension schemes must keep written records of their decision to wind up the scheme, or to defer winding up, and the steps, which should be taken for these purposes. The records should also include the date of wind up.

For any scheme that began to wind up on or after 1 April 1973 the trustees must make periodic reports to The Pensions Regulator (TPR) about the progress of the winding up if it has not been completed within three years. For schemes that began to wind up prior to 1 April 2002, the deadline for reporting is being phased in.

If the wind up began:

• before 1 January 1990 - first report due by 1 June 2002
• between 1 January 1990 and 31 December 1992 - first report due by 1 April 2003
• between 1 January 1993 and 31 December 1995 - first report due by 1 April 2004
• between 1 January 1996 and 31 December 1998 - first report due by 1 April 2005
• between 1 January 1999 and 31 March 2002 - first report due by 1 April 2006

If the wind-up begins on or after 1 April 2002 and before 1 April 2003, once the scheme has been winding-up for three years, the trustees will have one year to submit their first report.

For schemes winding-up after 1 April 2003, once the scheme has been winding up for three years, the trustees will have three months to submit their first report. Subsequent reports are to be made at least once every 12 months.

On request, trustees must provide members or beneficiaries with a copy of any report, which has been made to TPR in connection with the wind-up. The copy must be provided within two months of the request.

If TPR believes that progress is being hindered and is unlikely to be completed within a reasonable time period without intervention, then TPR may make directions about the scheme to facilitate wind-up.

Independent Trustees

The Pensions Act 1995 requires the appointment of an Independent Trustee where an insolvency practitioner or official receiver is appointed in respect of the employer. They are entitled to be paid out of the scheme resources for reasonable fees and any reasonably incurred expenses, in priority to all others claims.

An Independent Trustee is a person who has no interest in the assets of the scheme or of the employer and is not connected or associated with the employer. The purpose of the appointment is to vest all discretionary powers of the trustees in the Independent Trustee. The appointment does not discharge the other existing trustees who must continue to exercise their functions until they are removed, discharged or resign.

Previously the Insolvency Practitioner made the appointment of an independent trustee. The Pensions Regulator, who will refer to their register of Independent Trustees they have established, now makes the appointment. However, they do have discretion to appoint non-register trustees.

Cripps v Trustee Services Limited & Others (2007)

The Court of Appeal has decided, in the recent case of Cripps v Trustee Solutions & Others that any pension rights accrued during a "Barber window" of service (i.e. a period since the date of the Barber case in 1990 until scheme rules were changed to remove unequal pension ages between men and women) should be honoured by creating a right to a pension, but only on that particular period of service.

The court concluded that members of the scheme (which was winding up) who had the right to retire at age 60 in respect of a part of their service who were aged between 60 and 64 at the date when the scheme commenced winding up, should be classed as pensioners for the purposes of the statutory priority order set out in section 73 of the Pensions Act 1995. However, this did not apply in respect of pension or other benefits accrued during the remainder of their service that was subject to a normal retirement date of age 65.

Further Help

Remember to try and be patient on any winding-up. The trustees will normally be doing their best and delays are not usually, in our experience, their fault. It is in their interests, as much as yours, that matters are resolved as soon as possible. Finally, just remember that it is the duty of the trustees to look after your interests - allow them time to sort everything out.

If you have any queries regarding your pension which the scheme trustees have been unable to answer to your satisfaction, you can contact us.

Q & A's