Pension buy-outs: communicating with members about winding-up

So what must trustees tell members about this journey, and how can trustees present this information to members in a timely and concise way?

Introducing the idea of a buy-out

Are members aware of the scheme’s objectives for a buy-out, and do they understand what this means?  Early communications about this can help members to be included in the journey from the outset, and they can begin to contemplate receiving their benefits from an insurance company.  

This will also help to manage expectations and reduce surprises. So when trustees first communicate with members about a bulk annuity purchase, such as sending the insurer’s data protection notice within four weeks of purchasing the policy, members will view this as planned progress, rather than an unexpected development which could cause some anxiety. 

This can also help to get members engaged with any write-out exercises – where members are asked to confirm that their details held on the trustees’ files are correct. These may be needed to get a scheme ‘buy-in ready’ or ‘buy-out ready’ – insurers may require this to happen before buy-out, to ensure that the benefits being secured match the members’ understanding.

It is important that trustees plan these exercises carefully, consider what the bulk annuity insurers are likely to require, how these exercises might fit in with other similar projects, such as GMP equalisation, and let members know why this is important and what they can do to help.

The winding-up notice

It is usual to trigger a wind-up before moving to buy-out, as this makes it easier for the trustees to obtain statutory discharges, particularly for contracted-out benefits. Once a wind-up of a scheme is triggered, trustees must provide certain information to beneficiaries as soon as possible, and in any event within one month, in a winding-up notice, namely:

• a statement that the scheme is being wound up and the reasons why;
• a summary of any action that will be taken to establish the scheme's liabilities and recover any assets, and an estimate of when this is likely to happen; and
• an indication of the extent to which, if at all, the value of benefits is likely to be reduced – assuming that full benefits are to be secured without reduction.

As well as considering the statutory requirements, trustees should also consider whether their scheme rules require them to provide any other information. It is usually possible to combine the winding-up notice with the statutory discharge notice.

Trustees should ensure that regular communications are made with members to keep them informed of the progress being made during the winding-up process. Should the wind-up take longer than 12 months to complete, a further update should be provided to members.

The statutory discharge notice 

Trustees can obtain a statutory discharge from their liabilities if they secure benefits in one or more prescribed ways, such as purchasing individual annuities from an appropriate insurer.

To obtain the statutory discharge, trustees must provide a discharge notice to the relevant beneficiaries before the liability is discharged. On a buy-out, this notice should state:

• that the trustees propose to discharge their liability under the scheme pursuant to section 74 of the Pensions Act 1995;
• the way in which that discharge is being obtained. If the trustees wish to offer members any options – such as the option of a transfer to another scheme or a winding-up lump sum – the notice must give beneficiaries three months to confirm their choice;
• the sum which is available to be used to discharge the liability of the beneficiary – this is tricky, as insurers will not provide a member-by-member breakdown of the premium paid for the bulk annuity policy. A pragmatic approach is usually needed here, and trustees should discuss this with their lawyers;
• the name and address of the proposed annuity provider. It will be important to discuss the timing of this notice with the insurer, as it may not want its contact details to be provided until it is able to take on administration of members’ benefits; and
• the name and address of where the member may obtain information about the terms of the provision of their annuity, if different.

Trustees should also explain any other significant implications the buy-out will have for members and their benefits, e.g. if discretionary benefits are being fixed in a particular way, or certain member options will no longer be available upon buy-out, and the impact for DC or AVC pots. 

Trustees should also consider providing information about members’ benefit security and the protections afforded by the insurance regulatory regime.

Once the buy-out has taken place

Additional disclosure requirements apply once trustees have done what they can to discharge the liabilities. They must give pensioner beneficiaries the following information as soon as practicable and in any event within three months:

• a statement as to whether their benefits are being reduced because of underfunding, and, if so, by how much;
• a statement confirming who will be responsible for paying their benefits;
• the amount of benefit payable to them; and
• if the benefit is payable periodically, any conditions to which payment will be subject, and any provisions under which the amount payable will be altered, such as pension increases.

For deferred members, trustees must also provide an estimate of the amount of benefits expected to be payable from normal pension age or death. Some advisers take the view that this requires a full projection of benefits to normal pension age, with appropriate assumptions for future rates of inflation, etc. Others consider that providing a breakdown of the deferred pension together with information about how it will revalue until retirement is sufficient. 

In practice, much of this information is likely to be provided by the insurer when it issues individual annuity policies to the members. As such, it may be possible for trustees to meet this obligation by arranging for the insurer to issue individual policies within three months of the buy-out.  Otherwise, trustees will need to issue their own communications.

‘Farewell’ communications

The Pensions Regulator suggests that trustees consider communicating with members on a more regular basis to keep them up to date with developments. Other consultation or communication exercises may be needed depending on the circumstances, such as if changes need to be made to members’ benefits to facilitate a buy-out, or if the trustees intend to run any liability management exercises in connection with the winding-up.

If there is an expected surplus and the trustees propose to return all or part of this to the sponsoring employer, an additional member consultation is required. Finally, trustees will often wish to send ‘farewell’ communications to the scheme’s former members. This can be a good opportunity to tie up any loose ends, including explaining any arrangements for the retention of members’ personal data on the winding-up of the scheme.