An insolvency event (or the spectre of one) is clearly distressing for a company and its employees. It can also have implications for many former employees. Here, I look at the practical steps in preparing for this eventuality in trust-based defined contribution and defined benefit schemes.
Defined contribution schemes
A single entity, let’s call them Spare Parts Limited, is facing financial distress and possible insolvency.
It is important to ensure that all contributions are received (or recovered in the event of an insolvency). Actively monitoring and managing the contribution payments to a scheme to ensure that, as a minimum, they comply with these timescales, will reduce the risk of unpaid contributions on insolvency and allow the trustees to identify any possible risk of nonpayment at an early stage. If contributions are not recovered from the employer, they may be met by the Government – the appointed Insolvency Practitioner would usually look after this in conjunction with the scheme trustees/administrator.
It is also important to ensure that data and record keeping is kept up to date and that all members/beneficiaries are identified. This is a much easier task to complete while the employer is still trading.
If employees (and former employees) are members of a master trust arrangement, it is likely that the master trust itself will be unaffected by the insolvency of Spare Parts Limited.
Each member will have their own policy and their own defined contribution pot – this will continue after an insolvency event.
No further employer contributions will be payable by the employer but it may be possible for the member to make further contributions – this will depend on the rules of the master trust. The same would be true of a contract-based group personal pension plan. The position is less straightforward if the scheme’s only sponsoring employer is Spare Parts Limited (the scheme will be called an ‘own-trust’ scheme in these circumstances). In this case, an insolvency event is likely to lead to the wind-up of the scheme. If no monies can be recovered from the insolvency process to meet the expenses of the wind-up process it is likely that member funds will be used to subsidise the wind-up costs. These costs can be sizeable and if the scheme is small this may be a substantial proportion of the scheme funds. Additional ‘one-off’ costs of the wind-up process will include the preparation of final accounts, issuance of member statements, implementation of member options and member communications. For ‘own-trust’ schemes, it is therefore even more important that the scheme’s data and records are up to date while the sponsor is still around.
These additional costs and risks are one reason why ‘own-trust’ defined contribution schemes are diminishing in number and are considered to be less suitable as a pension option than master trusts or the contractbased equivalents such as Group Personal Pensions – particularly for smaller employers. Indeed, in its latest survey of trust-based DC schemes, The Pensions Regulator comments that larger pension schemes such as master trusts “are more likely to be run well and provide good value for members”.
The implications of employer distress or insolvency should, I would suggest, have trustees of a reasonable number of the remaining own-trust schemes looking for the ‘safe harbour’ of a master trust or other form of orderly wind-up at a point where the costs of doing so would not adversely impact member funds.
Director – Spence & Partners