Winding up a legacy pension scheme

What can a company do when a pension scheme stops being viewed as a valuable tool in attracting and retaining staff, and becomes a cost and governance burden? How did this come about?

We all know that the cost of providing a DB (defined benefit) schemes has morphed out of all recognition compared to how they were originally conceived, and now cause real concern to the sponsoring employer.

Even DC (defined contribution/money purchase) schemes have become a significant governance problem since the Pensions Regulator raised the bar in April 2015.

So, if the pension scheme is no longer pulling its weight for the company, can be done?

DB schemes are tricky devils and won't go down without a fight. Deciding to pull the plug on the scheme is highly likely to result in a huge bill for securing the benefits. This comes about because benefits must be purchased in full in the form of an immediate or deferred annuity with an insurance company. The cost of buying out the benefits in this manner is usually far greater than the assets held by schemes to match their Technical Provisions - in other words the cost of funding for benefits as and when they fall due, which could be many years into the future.

For many companies this is simply not do-able. But for some, the pain of cauterising this open sore makes financial sense and they are prepared to bite the bullet in order to remove the drain on management time and potential risk posed by the scheme.

Winding up a pension scheme is no simple matter, however, and there are many hurdles for the trustees to leap over. This is as true for DC schemes as it is for DB, and trustees must take care to discharge their duties fully and completely. The price of failing to cross all the Ts and dot all the Is is the danger that members may come back further down the line and claim that their benefits are incorrect. By that stage it may be up to the trustees to make good out of their own resources. This is a nightmare scenario, and trustees should do all that they can to ensure that they take proper professional advice and wind up the scheme properly.

Able Governance has decades of experience in winding up all types of occupational pension schemes- both defined benefit and defined contribution. This expertise was recognised by the Pensions Regulator when it asked director Nick Boyes to assist in the creation of the acclaimed Trustee Toolkit online training facility dealing with the wind up of DC schemes.

If you are thinking of winding up your scheme, or are in the middle of it and think you've bitten off more than you can chew, get in touch and we'd be delighted to see if we can help.