OPRA to help speed-up scheme wind-ups
The Occupational Pensions Regulatory Authority (OPRA) has just published an update for pension scheme trustees in the last few days, giving guidance to those who are in the process of winding-up their final-salary pension schemes. It wonít have escaped the attention of anyone reading the national press at the moment that quite a few final-salary schemes are winding-up right now, but whatís not generally known is that the Regulator has, as part of its role, a brief to ensure that wind-ups take place in a reasonable timescale.
Last year a piece of legislation called the ĎOccupational Pension Schemes (Winding Up Notices and Reports etc) Regulations 2002í, no less, came into force and laid this responsibility onto OPRA, and this new update is based on their experiences since then. Basically theyíre letting trustees know about the problems that arise during a typical wind-up and letting them know where they, as the Regulator, stand on the various issues. Itís probably easier than going through it all one at a time with every set of trustees.
If any of you want to read the full SP on all this you can get it by downloading Update 3 from the OPRA website at www.opra.gov.uk/publications, but for those of you who donít the following BeeLine-style summary might do the trick.
The problems OPRA has encountered with wind-ups over the last year or so relate to a number of specific areas. Iíll list them here and then go through them briefly one at a time. The eight points they single out in Update 3 are
- whether wind-up has started
- issues related to investment policy
- minimum funding valuations
- scheme deficits under section 75 of PA 1995
- transfer values
- guaranteed minimum pension equalisation
- employer solvency; and
- independent trustees.
Has wind-up started?
I know it seems obvious, but the question of whether or not the scheme wind-up process has started seems to be a matter of uncertainty to some scheme trustees. Most of the time the trustees themselves will have been the ones who decided to wind-up a scheme, but sometimes the actions of the sponsoring employer may have led to the wind-up. There are legal requirements regarding the recording of a decision to wind up a scheme and OPRA are recommending that, in cases where there is any doubt, the trustees establish whether the winding-up process has started and, crucially, the effective date that it did so.
Where schemes commence winding-up procedures OPRA say they expect trustees to take immediate advice as to whether their previous investment policy is still appropriate. Obviously, trustees cannot simply leave things as they are without having a good reason for doing so. OPRA also say here that they expect trustees to keep the investment policy under constant review during the winding-up period to ensure it remains appropriate. This is particularly important where significant events take place during the course of winding-up. So, checking the appropriateness or otherwise of the investments and keeping a close eye on things right through the wind-up process is what the Regulator expects of trustees.
Every three years, final-salary pension schemes are required to undertake a Minimum Funding Rate (MFR) valuation. A kind of financial health check if you like. Once a scheme begins to wind-up, though, OPRA say they are relaxed about this requirement and wonít worry too much if it is not complied with. They donít actually rule out the fact that some circumstances will arise when they will require the three-yearly MFR valuation to be done for a particular scheme, but by and large they are saying that the actuarial work going on to see that the assets in the scheme are sufficient to secure benefits for members should be sufficient anyway.
Where a scheme is in the wind-up process and a deficit is uncovered, the employer would normally put that right by putting up the extra readies required to get things sorted. Sometimes, though, some solvent employers donít like the idea of that very much and thatís where the provisions of Section 75 of the Pensions Act 1995 come in. What trustees can do is to get the scheme actuary to quantify and certify the amount of the shortfall and it can then be treated as a debt on the employer. OPRA are simply reminding trustees here of these provisions and giving them some guidance on how to go about doing this.
There has been a lot written about this topic this year following OPRAís announcement in February that some trustees could suspend the payment of pension transfers for individuals where such transfers would prejudice the rights of those not transferring. Iíve written a couple of BeeLines at least on the topic myself. What OPRA are reminding us of here in the context of winding-up is that similar relaxationís are (and always have been) in place. The Regulator says it is conscious of the fact that, at the time of winding-up, there is a good deal of uncertainty and that it will not penalise trustees who, while acting on the advice of the scheme actuary, decide not to issue guaranteed transfer quotations within the normal deadlines required. Like the February relaxation, though, this is not an open-ended offer for trustees to ignore the requests of individuals. Rather, it is still only available as an option to trustees who are actively working towards resolving outstanding problems and can demonstrate that they are doing so. Itís not simply a case of people who are in schemes that are winding-up finding that they are locked in for the duration. Far from it, in fact.
The equalisation of Guaranteed Minimum Pension (GMP) benefits held within occupational schemes by men and women has been something that, put simply, has caused a fair bit of bother all round lately. OPRA are saying that they are aware of the issues and that they understand different trustees may well use a wide variety of approaches to resolve this problem, and that some methods of applying equalisation may suit some schemes and not others. While they are careful not to endorse any particular approach over another, OPRA are mindful of the fact that this could become a stumbling block as far as wind-ups are concerned and say they are happy to let trustees, acting on advice, to do what is best for their particular scheme. This sort of pragmatic approach to what can be quite a pedantic argument is just the sort of thing I would think trustees will welcome.
OPRA is taking the opportunity here to remind bodies other than the trustees of the requirements placed on them by the 1995 Pensions Act. Basically, where a final-salary pension scheme is winding-up and the sponsoring employer is insolvent, then the insolvency practitioners (the guys who sort this kind of stuff out) are required to ensure an independent trustee is appointed.
Section 23 of the Pensions Act says that insolvency practitioners must be satisfied that at least one of the schemeís trustees is independent. If they spot that there isnít an independent trustee involved, the insolvency practitioner must put one in place within three months of when they first notice. Also, if the insolvency practitioner does not tell the scheme trustees they are satisfied that at least one of the trustees is independent, then the trustees themselves are expected to let OPRA know fairly sharpish. The bottom line is that, where the employer is insolvent, independent trustees need to be put in place, and there are no excuses for insolvency practitioners or trustees for not making sure this is done promptly.
Following on from the last point, some trustees clearly feel that once an independent trustee has been appointed there is no reason for them to remain involved too. OPRA goes to pains to point out the value they place on the past experience and background knowledge of the existing trustees, and my take on their comments here is that they are more comfortable where existing trustees remain available to help the incoming independent trustees do their job.
And thatís it really, in a nutshell. Overall Iíd say that OPRA Update 3 is a pretty helpful reminder of whatís what for trustees involved in scheme wind-ups and gives a good guide to the pragmatic approach the Regulator takes when issuing guidance these days. Anyone needing a deeper understanding of these issues than my thumbnail sketch of them here, can, as I said earlier, get a copy of Winding Up (update 3) from the OPRA website and may also like to get the technical guide, Winding Up (OPRA Note 10) while theyíre about it. The latter note is only available from the website, so as youíre out surfing at the moment anyway, if you need one why not pop over there and grab a copy while youíre about it? Me, Iím just going to go and get another shot of the juice that keeps me anaesthetised so I can keep writing this stuff. See you later.
27 August 2003
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