Philip
Goodchild explains why the introduction of amended regulations will force
companies to reconsider the financial implications of winding up final salary
pensions schemes
The
impending introduction of the Occupational Pension Schemes (Winding up and
Deficiency on Winding Up etc) (Amendment) Regulations 2003 will improve the
level of protection afforded to members of defined benefit (final salary)
occupational pension schemes where a solvent employer decides to wind up the
scheme.
The
current position when a defined benefit scheme is wound up by its solvent
employer – where the scheme’s liabilities exceed its assets – is that the
amount by which the liabilities exceed the assets becomes a statutory debt
enforceable by the scheme trustees against the solvent employer.
However,
the current statutory basis for assessing the liabilities is based on the
minimum funding requirement (MFR), which is a statutory solvency standard
introduced by the Government in 1997. Liabilities assessed on this basis are
significantly less than the actual cost of buying out members’ benefits by
purchase of annuities on the insurance marketÂ
The
regulations change the method of assessing liabilities so that solvent
employers will have to pay the total buyout cost of annuities for all members
of the pension scheme.
The
regulations have been amended following a number of high-profile pension scheme
wind-ups where members have not been provided with their full pension
entitlement because there simply isn’t enough money in the pension scheme to
buy out members pensions in full.
Until
now, the MFR funding standard meant that employers could avoid having to
provide the additional money to meet the full extent of the deficit.
The
amended regulations will, however, only apply to wind-ups which have commenced
on or after 11 June 2003.
Employers
who have commenced winding up their scheme before this date will avoid the new
regulations. For wind-ups commencing on or after 11 June 2003, the regulations
will significantly increase the likelihood that the members will receive the
pension benefits they have accrued in the scheme up to the date of the winding
up.
HR
managers considering how to cap the increasing costs of pensions provision for
their staff will need to be more wary of the costs of winding up their pension
schemes.
It
may be worth investigating alternatives, such as continuing the scheme but
closing it either to new entrants or to future accrual to reduce costs.
Where
employers who operate a number of pension schemes consider merging the schemes
in the interests of reducing administration costs, the trustees of the scheme
receiving merger proposal will now make a closer assessment of the possible
alternative of winding up the pension scheme in assessing whether or not a
merger is in the best interests of their membership.
The
consultation period for the amended regulations ended on 22 July and it is
expected that the regulations will come into force within the next few weeks.
The
regulations will be back-dated to 11 June 2003 so that there is no window of
opportunity for employers to commence the winding up of their defined benefit
pension arrangements on or after 11 June this year without the regulations
applying to them.
In
summary:
–
The regulations will require solvent employers who wind up their defined
benefit pension schemes to meet the cost of buying members pensions in full
where the scheme assets are insufficient
–
HR managers will have to take into account the cost of the regulations when
assessing whether to wind up their defined benefit pension arrangements as part
of any restructuring of benefits for staff
–
Alternative options such as closing the pension scheme to new members rather
than winding it up could be considered as an alternative to reduce costs of
pension provision
–
Employers who commenced winding up their scheme before 11 June 2003 will not be
affected
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–
The regulations are expected to be in force in the next few weeks.
Philip
Goodchild is a senior lawyer in the Employment, Pensions and Benefits Group at
law firm Stephenson Harwood
