Out-Law Analysis 4 min. read
20 Mar 2024, 3:16 pm
Pension scheme buy-outs are increasingly popular in the UK pensions market as a way for trustees to offload the risk of funding and paying for members’ benefits.
Pinsent Masons is advising on a growing number of such buy-outs by insurers and the subsequent winding-up of schemes by trustees. In our work, we have encountered cases where trustees have had to consider what to do about defined contribution (DC) assets when winding-up, navigating various complexities while doing so.
In one case, the DC assets in question were additional voluntary contributions (AVCs).
In other cases, schemes may have open or closed DC sections. This could be the focus of an article in its own right, so this article primarily looks at the first scenario.
At out the outset we considered the following options with the trustees:
There are several questions that trustees should ask themselves when seeking to discharge DC assets on winding-up their scheme.
In one case we advised on, this question was a key reason for the trustee choosing option one, and discounting option three. In other cases, for example schemes which are keeping their DB section open and are only discharging the DC section, trustees may be able to consider a ‘transfer back’. This was not an option in this particular case we advised on, where the scheme was going to wind up.
For some schemes, option two may not always be possible – trustees should engage with their advisers and the insurer early on to discuss the available options. In one case we advised on, the trustees had advisers specifically advising on discharging the DC assets. They led the conversations with the insurer and oversaw the process and timetable.
Where they are able to do it, the insurer may include in the buy-in policy a framework for DC assets in the scheme to be passed to them prior to buy-out.
In order to proceed with option one, the scheme rules will need to be checked to ensure they allow the trustees to secure the DC benefits in the way envisaged. If necessary, the rules will need to be amended, and this may need to be done before the winding-up starts depending on whether the amendment power remains available during the winding-up.
If the trustees are securing the DC funds using such buy-out policies in the context of winding-up, member consent is not required. In all other cases, advice should be taken about whether member consent is needed.
Even where option one is chosen, trustees may wish to write to members giving them sufficient notice – at least three months in advance of exercising the option – to make an individual transfer elsewhere should they wish to do so.
Trustees will also need to be satisfied that discharging the DC assets is in members' best interests, in accordance with their fiduciary duties.
Trustees should also have a clear understanding of the investment issues to determine whether it is in the best interests of members from an investment perspective. As changes are to be made to investments still held by the trustee, even though only for a very short time before being assigned to the individual members, the trustee has a statutory obligation to consider "proper advice" as to whether the investment is satisfactory. The trustee should seek advice in this regard and decide whether that advice supports a decision to proceed.
As explained above, in one of the cases we advised on, the trustee had DC advisers who had developed their own project plan and timetable. This needed to be carefully aligned with the insurer’s main project plan to identify key timeframes, such as in relation to when the DB funds were to be transferred, and when the policies were to be assigned. Alignment of different project plans is therefore essential.
Trustees should also liaise closely with the DC advisers and bring them into the main project calls where possible and appropriate.
As with any major project, communication through the process is important. Involving the DC advisers on the main project calls ensures that important information – for example, changes to the timetable – are filtered through to the parties involved
Trustees also need to check that the current DC providers understand what is being proposed. In our recent experience, inappropriate forms were sent because the current provider did not understand what was happening in practice. A conversation with the relevant parties ironed out this issue and the process was simplified as a result.
Co-written by Heather Lucas of Pinsent Masons.