Well funded schemes can still impact employer insolvency
Pension scheme funding has improved significantly for many schemes recently, while the outlook for many employers is not as bright. For schemes which are close to being able to secure members’ benefits with an insurance company, employer insolvency can be a real problem. Employer insolvency starts an assessment period for a defined benefit pension scheme to enter the PPF – and stops the scheme being able to secure benefits. Trustees and employers need to explore creative solutions to prevent unexpected problems.
Recent improvements in pension scheme funding means many defined benefit pension schemes will be able to secure benefits with an insurer under a buy out contract much sooner than expected. The process of securing benefits is time consuming and requires a significant amount of preparatory work by trustees. So what happens if the employer becomes insolvent before that process is finished?
Most employer insolvency events will trigger an assessment period for entry into the Pension Protection Fund. Schemes which are sufficiently underfunded go into the PPF, which pays compensation to members in place of their scheme benefits. Schemes which are too well funded have to wind up outside the PPF, but not until the end of the assessment period, which itself can take eighteen months or more – even when it seems obvious the scheme is too well funded to go into the PPF.
During the assessment period, there are restrictions on what on trustees can do, which prevent them from doing certain things – including entering a contract to secure member benefits with an insurer. That means trustees who are well on the way to buying annuities can find themselves unable to continue that process, with the risk that pricing will have moved against them by the time the assessment period ends so that benefits cannot be secured in full for members. The legislation assumes schemes are underfunded so there is no facility for the PPF to approve or allow trustees to enter a buy out contract.
Schemes can become ineligible for PPF entry – for instance if trustees compromise a debt owed to the scheme by an employer. In that case the insolvency of the employer would not lead to an assessment period and trustees would be free to carry on with securing members’ benefits, which could be a better result for all parties. Other solutions may also be possible but will need time and planning.
Key to a successful outcome is engagement with the trustees before insolvency to allow time to plan a solution so that securing members’ benefits is not derailed by a PPF assessment period. Not having to deal with the PPF during the insolvency will also make that process easier for the employer.
Even a well funded scheme needs to be taken into account when insolvency is on the horizon – engage with the trustees early on to avoid unexpected problems.