Should we consider winding up our closed final-salary scheme?
You have an insured scheme where the investment is via the insurer's with-profits fund and so is protected against adverse stockmarket movements. This has been an advantage as you have not suffered directly the poor stockmarket performance over the last year, unlike some of the schemes in the press headlines.
As a measure of the scheme's funding, the minimum funding requirement partially tracks the stockmarket. Your fund has moved from a small deficit into surplus. This is the first time it has been fully funded on an MFR basis and gives you the opportunity to start to wind up the scheme.
There are a number of issues to consider and you need to bear in mind that, as trustee, your considerations may be different from your position as director of the company.
Under the Pensions Act 1995, a scheme is solvent if it can provide MFR cash-equivalent transfer values for members. Section 74 of the act allows the scheme to be wound up and trustees given a statutory discharge if the required formalities are followed.
The members are offered their cash-equivalent transfer values and can choose where to invest this transfer value, for example, into their own personal pension, the company group personal pension, a buyout plan or a non-profit deferred annuity policy.
The trustees can offer a default of an invested buyout policy for those members who cannot be contacted or do not choose an alternative. A non-profit deferred annuity can be used as a default option but, as the cash equivalent assumes equity growth and the non-profit plan assumes growth on gilts, less insurance company reserves, it will produce a much lower – for example, 40 per cent or more – prospective pension. Therefore, the buyout plan may be the best default although the element of investment risk needs to be made clear.
As trustees, you must advise all scheme members in writing that the scheme is to wind up and give them details of the various options. The default option can be used if a member cannot be traced or has not indicated their choice. To comply with Section 74 of the Pensions Act, you also need to advise the members that they should take independent financial advice before making their choice.
The trustees can possibly claim for more than MFR if the company is solvent. There is no case law on this exact area as the Blagden scheme, where the trustees made a claim for the full cost of benefits using non-profit plans, was settled out of court.
As a company director, you would obviously not wish to impose a further financial burden on the company but your responsibility as a trustee is to the scheme beneficiaries. I would suggest you consider a compromise, with the savings on winding up the final-salary scheme being passed on to members as additional contributions to a replacement group personal pension.
Instead of winding up the scheme, the trustees could continue running a closed fund but this is a risk for all parties that could be hard to defend if the solvency falls in the future.
Another potential area of concern to trustees in your position is the treatment of the guaranteed minimum pension in relation to retirement age.
After the Barber judgment, where retirement ages were equalised, and under the Pensions Act, the European ruling on equal pension ages for men and women was made law for all schemes. Unfortunately, the Government has not put its own house in order as Serps pensions were not retrospectively equalised and, therefore, GMPs are still based on unequal ages. So the law says they must be equal but they are not and neither the Government nor any court has given any direction on what to do.
Trustees have a choice. They can pay the scheme actuary to work out a basis to equalise benefits or leave the benefits as they are, arguing that the costs involved would reduce everyone's benefits. These are areas where the trustees may wish to take legal advice. There are protections within the trust deed and, under Section 21 of the Trustee Act 1925, protection is given in that, if trustees act in good faith, no one can attack their decisions.
Although winding up the scheme seems sensible, it is important that you consider these areas, particularly with the current press attention.