Pension buy-outs: discharging DC assets on winding-up

Pinsent Masons is advising on a growing number of such buy-outs by insurers and the subsequent winding-up of schemes by trustees. In our work, we have encountered cases where trustees have had to consider what to do about defined contribution (DC) assets when winding-up, navigating various complexities while doing so.

Why might a scheme have DC assets?

In one case, the DC assets in question were additional voluntary contributions (AVCs).

In other cases, schemes may have open or closed DC sections. This could be the focus of an article in its own right, so this article primarily looks at the first scenario.

What options do trustees have for discharging the DC assets?

At out the outset we considered the following options with the trustees:

• exercise an option in the buyout policy to secure the DC funds alongside the DC benefits (option one);
• assign the current policies into the members' own names (option two);
• secure the DC funds with another scheme or provider by way of a partial transfer of members' benefits, such as through a transfer to a master trust (option three).

What are the main considerations for the trustee?

There are several questions that trustees should ask themselves when seeking to discharge DC assets on winding-up their scheme.

Would members be able to use their DC funds towards their tax-free pension commencement lump sum?

In one case we advised on, this question was a key reason for the trustee choosing option one, and discounting option three. In other cases, for example schemes which are keeping their DB section open and are only discharging the DC section, trustees may be able to consider a ‘transfer back’. This was not an option in this particular case we advised on, where the scheme was going to wind up.

What is the insurer willing or able to do?

For some schemes, option two may not always be possible – trustees should engage with their advisers and the insurer early on to discuss the available options. In one case we advised on, the trustees had advisers specifically advising on discharging the DC assets. They led the conversations with the insurer and oversaw the process and timetable.

Where they are able to do it, the insurer may include in the buy-in policy a framework for DC assets in the scheme to be passed to them prior to buy-out.

What do the scheme rules permit?

In order to proceed with option one, the scheme rules will need to be checked to ensure they allow the trustees to secure the DC benefits in the way envisaged. If necessary, the rules will need to be amended, and this may need to be done before the winding-up starts depending on whether the amendment power remains available during the winding-up.

Is member consent required?

If the trustees are securing the DC funds using such buy-out policies in the context of winding-up, member consent is not required. In all other cases, advice should be taken about whether member consent is needed.

Even where option one is chosen, trustees may wish to write to members giving them sufficient notice – at least three months in advance of exercising the option – to make an individual transfer elsewhere should they wish to do so.

Is it in the members’ best interests?

Trustees will also need to be satisfied that discharging the DC assets is in members' best interests, in accordance with their fiduciary duties.

Trustees should also have a clear understanding of the investment issues to determine whether it is in the best interests of members from an investment perspective. As changes are to be made to investments still held by the trustee, even though only for a very short time before being assigned to the individual members, the trustee has a statutory obligation to consider "proper advice" as to whether the investment is satisfactory. The trustee should seek advice in this regard and decide whether that advice supports a decision to proceed.

Practical considerations and potential trips

As explained above, in one of the cases we advised on, the trustee had DC advisers who had developed their own project plan and timetable. This needed to be carefully aligned with the insurer’s main project plan to identify key timeframes, such as in relation to when the DB funds were to be transferred, and when the policies were to be assigned. Alignment of different project plans is therefore essential.

Trustees should also liaise closely with the DC advisers and bring them into the main project calls where possible and appropriate.

As with any major project, communication through the process is important. Involving the DC advisers on the main project calls ensures that important information – for example, changes to the timetable – are filtered through to the parties involved

Trustees also need to check that the current DC providers understand what is being proposed. In our recent experience, inappropriate forms were sent because the current provider did not understand what was happening in practice. A conversation with the relevant parties ironed out this issue and the process was simplified as a result.

Co-written by Heather Lucas of Pinsent Masons.