Is your pension scheme suddenly an opportunity, not a burden?

Usually pensions lawyers write about traditional defined benefit (final salary-type) pension schemes, in the private and public sectors, as a bad thing for employers. Almost all of them are long closed to new members and building up new benefits. But they sit on the balance sheet, year after year, demanding more and more money in an apparently impossible attempt to get them to the point where they are so well funded that they can finally be wound up and forgotten about, the liabilities transferred to a grateful insurance provider.  At the same time, increasingly stringent regulation and oversight means that they take up more and more management time too.  And they’re not even a recruitment and retention tool anymore, as usually no-one has any further access to them.

At the moment, though, the situation is different.  All those years of funding ‘deficit recovery contributions’ for schemes you sponsor, or paying whatever is demanded if you are part of a public sector scheme, might just pay off.

It might be only for a short time, as markets may move, but now may be time to consider whether it’s time to cash in, or at least cut your losses, or even to take a decision to let your scheme run on and draw benefits later.

Your own schemes

If you have historically sponsored a pension scheme, you will be well aware of how much it will have cost you over the years. It seems a bottomless pit, swallowing your money.

But, perhaps, now is the time to consider whether it’s worth getting some of that money back, or having a well-funded pension scheme work for you.

We’re certainly working with employers and trustees who are finding that, when their schemes are valued, their deficits are suddenly much smaller than previously, and sometimes have become surpluses. This creates an opportunity.

The first question is whether to move the scheme towards winding-up, or to work with the Scheme’s trustees to create further value, which could in the future (rules permitting) allow further repayments to you as an employer and possibly also further enhance scheme benefits.

It’s an important decision. Lock in benefits (or minimise downsides) now, or take what might appear to be something of a risk in the hope of further future benefits (subject to tax on returns of funds to an employer). Generally, the bigger the scheme, the more options there are. It’s a good time to take a hard look at your legacy pension schemes, and at the least satisfy yourself that what’s happening now is the right way to go.

And of course it needs advice — actuarial, investment and legal. From our perspective, if you’re thinking about moving to winding-up, do often old rules work for the normal modern approach of buying-in an insurance policy, then transferring all liabilities to the insurance company, and finally winding-up? And who can do what between employer and trustees while it’s happening? And can any final surplus be returned to the employer? And who decides?

A lot of the same questions apply if you’re thinking about keeping the scheme running. You need to make that it does make economic sense for you as an employer to keep funding it, and bear the risk of funding levels falling. Critically, you must eventually be able to realise your further investment. The Government has recently announced plans, that may be included in this year’s Pension Schemes Bill, to make it easier for employers to release surplus from pension schemes without having to wind them up.

It’s worth thinking about now, and we can help if you want to consider your options.

Are you in the Local Government Pension Scheme?

Something similar is happening in public sector pension schemes. Not for the schemes as a whole, as arrangements like the Local Government Pension Scheme will still exist into the future. But for many years, a condition of outsourcing services from the public sector to the private and third sectors is that the new employers of employees transferred from the public sector had to become an employer in the LGPS (similar requirements were in place for other public sector pension schemes, but their funding structures are different and they normally don’t run at a surplus or deficit for specific employers).

These days, you would as an employer normally protect yourself from the downsides of LGPS exposure with the agreement of the transferring authority. In essence, you protect yourselves from the downsides of LGPS employer admission by giving up any possible upsides. The former employer authority takes both the risk and any potential rewards.

But what if your admission to the LGPS was historic, before it was common practice to protect new commercial employers from downside risk? What if you’ve been desperately trying to avoid an unplanned exit from the LGPS and the exit costs that go with it?

Once again, this might be the time to trigger that exit if you can. It can be a complex process, especially if you have large numbers of staff in LGPS and/or there is no contractual mechanism for terminating the contract, or if you want to keep the contract going. But it is possible, although it will take careful planning and discussions with other parties, including in many cases staff and trades unions or other employee representatives.

Can I actually get money back?

In some cases, yes. If your pension scheme is in surplus when it is wound up, so that it has more assets than are needed to fund benefits, then, depending on scheme rules (and possibly trustee decisions), you might.

You will need to check your scheme’s rules carefully to see whether you as an employer are entitled to any repayment of surplus, and whether the scheme’s trustees have a discretion over how any surplus is used. For example, they may well be able to use some or all of the surplus to enhance members’ benefits as an alternative to returning it to you. Often, it is possible to agree with the trustees how they will use any such discretion as part of the process. Generally, given you have been funding a pension scheme for many years, and members have received all of their promised benefits already, the trustees will decide to return any surplus to you. But it’s important to understand who has the power in a winding-up. It’s best to do so before you press the winding-up button.

Is it worth doing even if there is no chance of a refund, and it will still cost us money?

Again, possibly yes. At the moment, given general scheme funding and economic conditions, even if you don’t stand to receive a surplus, the costs may be more palatable even if you still have to pay something.

Code of Practice on Scheme Funding

It’s not all good news, of course. The Pensions Regulator has recently consolidated, reissued and amended a number of its codes of practice into one general code, including in respect of funding.

This in some cases will alter a pension scheme’s trustee’s behaviour and expectations of you as an employer, including in respect of funding and investments.