Trustee Guidance: Financial Management
Introduction
Trustees retain responsibility for managing the pension scheme during an assessment period. Many aspects of managing the scheme will remain the same, however, certain aspects of running the scheme will change because the Pension Protection Fund is assessing the scheme.
The main changes are that:
- Admissible rules need to be considered
- Pension Protection Fund levels of compensation will need to be calculated for all members and if necessary pensions in payment need to be reduced to these levels
- Restrictions will need to be applied
Trustees will also need to ensure their investment strategy is appropriate for a scheme in an assessment period.
The caseworker will support the trustees throughout the assessment period.
Objectives
To ensure that during the assessment period the financial management of the scheme complies with legislative requirements and enables the efficient assessment of the scheme.
Key Activities for Trustees
Review the scheme rules to establish which are admissible (as this is central to paying benefits at Pension Protection Fund levels).
Trustees should:
Identify pension scheme rules which came into operation through the winding-up of the pension scheme or any associated event and treat them as void
And
Identify any pension scheme rule changes and/or discretionary increases in the rate of any pension in payment or postponed pension which were made or took effect in the three years before the assessment date. If the combined affect of all of such rules changes and increases resulted in an overall increase in the pension scheme’s liabilities then they are to be disregarded leaving only the ‘admissible rules’.
It is in accordance with the admissible rules that compensation levels should be calculated.
The legislation (Pensions Act 2004 - Schedule 7, section 35(6) and (8)) gives information about pension scheme rules and discretionary increases allowed in calculating Pension Protection Fund compensation. For example rule changes required by any enactment are permitted. Further information is available on admissible rules and their application in the attached appendix.
Reviewing the scheme rules may, on occasion raise complex queries. These queries will need to be resolved, however, if this threatens to significantly delay the calculation of compensation levels trustees should discuss this with their caseworker.
Trustees will need to confirm in writing that a review of admissible rules has taken place.
Calculate compensation levels for all and ensuring benefits are paid at Pension Protection Fund compensation levels
On the basis of the admissible rules trustees will need to calculate for all scheme members the level of compensation they would receive should the scheme enter the Pension Protection Fund. However, trustees should prioritise the calculation of compensation for pensioners. It is particularly important that pensions in payment are, where necessary, reduced to Pension Protection Fund compensation levels as delays could result in substantial overpayments.
The attached appendix, as above provides guidance to explain how compensation is calculated including details on:
- Compensation levels
- Compensation cap
- Separate pension scheme lump sums
- Commutation of pension for lump sum
- Revaluation
- Indexation
- Early payment
- Survivors and dependents
- Divorce and pension sharing
- Cash balance pension schemes
- Short term pension scheme members
- Normal pension age
Trustees should provide evidence that the compensation levels have been correctly calculated- the format this should take should be discussed with the caseworker.
Deal with any outstanding benefit claims which arose prior to the assessment date
In particular, trustees should be aware of the provisions relating to outstanding ill-health applications.
Apply restrictions
There are restrictions that apply to pension schemes during the assessment period. Under Sections 133 & 135 of the Pensions Act 2004 the trustees must apply the restrictions as listed below when managing the pension scheme
- no new pension scheme members can join the pension scheme, except pension credit members;
- no further pension scheme member/employer contributions can be paid into the pension scheme – unless they were due before the assessment date as a result of recoveries from the employer/insolvency practitioner;
- pension scheme members cannot accrue further benefits after the assessment date;
- trustees of a pension scheme cannot trigger the winding-up of the pension scheme. The Pensions Regulator may, at its discretion, still direct the winding-up of the pension scheme under section 11 of the Pensions Act 1995, in order to protect the Pension Protection Fund; and
- liabilities may not be discharged from the pension scheme during this period - unless they should have been discharged prior to the assessment date or in other specified circumstances.
Any actions by the trustees which do not comply with these restrictions will be found to be null and may result in a civil penalty being imposed on the trustees, by the Pensions Regulator, unless the action has been approved by the Board of the Pension Protection Fund.
To provide a level of flexibility and to ensure that pension scheme members are not unduly disadvantaged during the assessment period, the Pension Protection Fund has the power to lift certain restrictions if this is consistent with keeping any deficit in the pension scheme to a minimum. Please discuss these situations in advance with your caseworker.
Consider Investments
The Board of the Pension Protection Fund would expect trustees to review the pension scheme’s investment strategy to ensure it is appropriate now the scheme is in an assessment period. If trustees have any concerns they should consider taking investment advice. However, should the trustees wish to clarify the Board of the Pension Protection Fund’s position with regard to investments they should discuss this with their caseworker.
Trustees should keep the caseworker updated about the pension scheme’s investments. The attached template sets out the information we will need at the start of the investment period and this should be updated quarterly.
Consider Audited Accounts
Recent regulations, including the introduction of transitional arrangements between old and new requirements, mean that this is currently a complex area. Trustees are advised to contact their caseworker for advice appropriate to their scheme’s particular circumstances. We have prepared a set of relevant Q&As which may prove to be helpful.
Key Activities for the Pension Protection Fund
Support trustees reducing pensions in payment to Pension Protection Fund compensation levels and calculating compensation levels for all members.
Created May 2006
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