Key messages
- Triggering wind-up is a pivotal and irrevocable step for a scheme
- Take early legal advice on the balance of powers in the trust deed and rules
- Understand the areas where triggering wind-up sets the clock ticking
- Consider the actions that can only be undertaken before triggering wind-up and the actions that must be undertaken afterwards
- The sponsor may have a view around the timing of triggering with respect to year-ends and accounting recognition of buy-out
Understand your Deed…and understand it some more….
Triggering wind-up is an irrevocable action which sets in motion a number of requirements (such as notifying the Pensions Regulator within five working days and communicating to members within a month) and is clearly a huge milestone for any scheme.
Before any decision is taken, both the trustees and the sponsor should look to fully understand the requirements under the scheme's trust deed and rules. Key information will include who can trigger wind-up, what process should be followed, what the amendment and augmentation powers are and whether these change after wind-up is triggered.
Regardless of who has the power to trigger wind-up and who is driving the process, it remains the responsibility of the trustees to make sure that the right benefits are paid to the right members at the right time.
If the scheme is likely to wind-up with a surplus, which party has the power to determine what happens to that surplus may be particularly key. It is most commonly the trustees who have the power to decide how to use any surplus, but the sponsor may be party to the decision. There are a whole plethora of different provisions out there, ranging from rules only allowing surplus to be refunded to a sponsor, to rules forbidding refunds or rules requiring benefit improvements in a specific form (and in the odd case, to a very high level of benefit).
The interaction of different rules can often start a negotiation process – for example where the sponsor has the power to trigger wind-up but the power on how to distribute any surplus sits with the trustees, and the sponsor wants all or a share of the surplus refunded. Coming to 'in-principle' decisions on issues like these ahead of triggering wind-up is key.
Be aware of the ticking clock
Both parties will probably start with a view to 'get on with it' and look to trigger as soon as possible. However, there are some areas worth a bit of thought before making any decisions.
- For a scheme winding-up in its recovery period, the Pensions Regulator expects to be sent a winding-up procedure "as soon as is reasonably practical". If the recovery plan is due to end shortly, the governance burden might be reduced by waiting a short time to trigger thereby avoiding the need to produce this document
- The Pensions Regulator has an expectation that schemes will wind-up within two years and requires annual progress reports to be submitted once those two years have passed. This may suggest not triggering too soon, although this is unlikely to be seen as a showstopper
- Once in wind-up, a 'statutory estimate of solvency' has to be prepared on an annual basis, which may be seen as adding nothing but cost. Triggering just after a scheme year-end, as opposed to just before, would postpone the first solvency estimate by 12 months
- Members need to be notified of wind-up being triggered within a month, and trustees will want to consider the timing of that, possibly in conjunction with other member communications
- Subject to a scheme's rules, legal advice usually confirms that triggering wind-up within 15 months of the triennial actuarial valuation date can avoid the need for the funding valuation (although the Section 179 (PPF) valuation is still required)
- One consequence of the scheme-specific funding regime falling away is that, should any unexpected costs be incurred which mean additional funds are needed, the usual mechanism to trigger additional contributions via putting in a place a recovery plan is no longer an option. Instead, this would need further discussion between trustees and sponsors or application of employer debt provisions
- If you are likely to wind-up with a surplus, with some or all of the surplus being refunded to the sponsor, you need to factor a minimum of five months into your winding-up plan for the required two-part member consultation. If you have a time by which the scheme needs to be wound up, this may mean triggering earlier
- If you're planning a winding-up lump sum exercise, these offers cannot be made until winding-up has been triggered. Section 27 notices can also not be published until after winding-up has been triggered
- Last (but most certainly not least), the draft Pensions Bill includes some provisions to help schemes start to deal with any Section 37 issues they might have. We still need some more detail before any action can be taken but it's a positive first step. Finally some good news!
Sponsor views
The sponsor may have a view on whether they want a scheme to be in wind-up across year-ends, depending on auditor input and potential analyst views. They may even look to complete wind-up within the same corporate year that it is triggered, which is an argument for triggering soon after a year-end.
On a related note, the sponsor may have a strong preference for reflecting any settlement implications in a particular accounting period (especially if they account under US GAAP) and so a collaborative approach between trustees and scheme sponsors is generally encouraged.
Availability of personnel around the sponsor's year-end may be another factor to take into account.
Wind-up complications
In reality most cases are also likely to have one or more scheme-specific 'issues' to deal with. These can lead to significant delays and unbudgeted costs if wind-up has already been triggered. Some common issues are set out below:
- Disputes – trustees should try and resolve any IDRP cases and a scheme cannot complete wind-up if there are any Ombudsman referrals outstanding
- Residual risks and undischarged liabilities (eg untraceable members) – typically dealt with either through insurance or indemnity protection from the sponsor
- Guarantees under with-profit AVC contracts
- Historical annuities – these are typically transferred into a member's own name, but the process can be time consuming
- GMP equalisation payments and adjustments to pensions
- Any data cleanse issues or complicated/uncertain benefits, such as underpins
- Residual illiquid assets
- Section 75 debt recoveries
- Any relevant clauses in the buy-in contracts – consult your transaction specialist in good time
