Throughout our various discussions on occupational pension schemes, we have explored in detail the different types of occupational pension schemes, the type of benefits that are payable therein, the rights of members and, more recently, taxation.
Remember that an employer sets up an occupational pension scheme for the provision of pension benefits for their employees.
Occupational pension schemes can be either defined benefit (a defined benefit is promised at retirement) or defined contribution — determined by the scheme trust deed and rules and the benefit at retirement depends on the member’s accumulated contribution balance.
But what happens if the employer ceases to exist for one reason or another? What happens to your pension benefits?
The good news is that the members’ pension benefits are protected.
There are a couple of things that members’ need to know.
A scheme might be wound up when an employer can no longer support it by paying its contributions. For example, because it has gone out of business. If a company is insolvent, the pension plan will be terminated and the same can happen in the case of reorganisation of a company.
However, members’ pension benefits will not be forfeited during employer insolvency or winding up. How so?
For starters, all registered schemes are set up under irrevocable Trust. This means that the scheme is a separate legal entity from the employer that establishes the scheme and its assets do not belong to the employer. The assets are, therefore, protected and cannot revert to the employer in instances of insolvency. In other words, the employer’s creditors cannot make a claim on the scheme assets.
Furthermore, registered retirement schemes are regulated by the Retirement Benefits Authority (RBA) under the Retirement Benefits Act and Regulations.
So, there are set regulations that drive the process of the liquidation of a pension scheme and ensure transparency and equity for the members of the affected schemes. The regulations provide that, in the winding up of a plan, the value of interests and pension benefits of the members are ascertained through a pre-determined procedure.
The only not-so-good news, however, is that the process of winding up a pension scheme is difficult and time-consuming.
As per the set regulations, a liquidator needs to be appointed to wind up the affairs of the scheme and to submit to the RBA preliminary accounts and reports, which can also be submitted to members.
Any fees payable to the liquidator are borne by the scheme.
At the end of the liquidation, members’ benefit entitlements are the net proceeds after all necessary expenses have been deducted. The expenses are pro-rated among all the members of the scheme.
The impact of winding a scheme is significantly different depending on whether the scheme is a defined benefit or a defined contribution.
A defined benefit scheme represents a fixed promise by the employer to pay the member a stated amount at retirement.
An employer’s insolvency or closure translates into one being unable to meet that promise in full.
The Board of Trustees, who are ultimately responsible for the safe operation of the scheme and enforcing the rules of the Trust, would obtain a detailed valuation of the scheme and deal with the winding up of the scheme and the way that the members are to be compensated — which is particularly complex due to the need to ensure fair treatment of members.
The scheme trust deed and rules usually spell out how this is to be done.
Whether the direct benefit is funded or unfunded also determines the procedures to be followed. Members’ benefits will be secured to the extent of the assets in the direct benefit scheme, which might mean a reduction in the benefits payable if the scheme is underfunded.
A DC scheme has no future obligation to the members once it is wound up save to secure the benefit already built up in the members’ individual pension pot. Recall that for a defined contribution, it is the contribution that is defined, not the final benefit.
Members would have the option of transferring their pension benefits to another registered retirement benefits scheme or receive their benefit entitlements as per the scheme rules.
Such benefits shall also include those assigned for purposes of providing for pension-backed mortgages.
All in all, each scheme is governed by the trust deed and rules that usually clearly indicate the procedure to be followed in the event of the wind up of the scheme.
During the process of the winding up of a scheme, the trustees have a duty to keep members informed of the progress made on the liquidation.
This article brings us to an end of our focus on pensions and retirement.
Before we move on to other savings and investment topics, we would like to invite readers to send us any pension and retirement-related questions through our e-mail addresses.
We will do our best to respond to some of them in the next article in our series.