Trustee Guidance: Multi-employer pension schemes
Introduction
Multi-employer pension schemes may be structured in many different ways. Two main categories of structure are:
- segregated assets and liabilities; and
- non-segregated assets and liabilities.
The following diagram illustrates these main categories:
In turn, there are further categories of pension schemes within each structure as follows:
- segregated pension schemes on withdrawal of a participating employer:
- single employer sections – where each section is treated similarly to a separate single employer pension scheme in the Pension Protection Fund process; and
- multi-employer sections – where each section is considered as a pension scheme in itself, segregated or non-segregated, and the structure – on withdrawal of a participating employer – can be:
- with no requirement for partial wind-up;
- with requirement for partial wind-up; or
- with an option for partial wind-up.
- non-segregated pension schemes – on withdrawal of a participating employer the structure may have:
- no requirement for partial wind-up;
- a requirement for partial wind-up; or
- an option for partial wind-up.
If specific sections of a pension scheme are required to wind-up, the trustees must take similar action for both Pension Protection Fund purposes and wind-up purposes, for each section in relation to the:
- pension scheme valuation; and
- apportionment of assets and liabilities.
Segregated pension schemes
A segregated pension scheme is divided into sections, each of which is separate to the other sections.
There may be common administration and a common investment pool for the whole pension scheme, for example to benefit from economies of scale, but each section’s assets and liabilities are identifiable. In segregated pension schemes no section in the pension scheme takes responsibility for a funding shortfall in another section, ie the risk of an unsupported shortfall following employer insolvency is not shared across the pension scheme.
Segregated pension schemes are divided into at least two sections. For each section:
- there is normally either a:
- single employer; or
- group of employers.
- contributions payable to the pension scheme are allocated to each employer's (or each member’s) section; and
- a specified portion of the pension scheme’s assets:
- are attributable to each section; and
- cannot be used for the purpose of any other section.
When a section has only one employer, the Pension Protection Fund will treat this section in a similar way to a single employer pension scheme.
When the sections have more than one employer, each section is considered as a separate pension scheme, for example the section is looked at to see if it is a segregated or non-segregated section in relation to the participating employer, and is dealt with in the same way as a section in a segregated or non-segregated pension scheme. For the structures, as defined in legislation, see below.
Single employer sections
Each section can be treated as a single employer pension scheme with only a few differences to the main process, but instead of considering the whole pension scheme only the section is taken into account for the purposes of the Pension Protection Fund. For example the:
- assessment period is triggered by an insolvency event in relation to that section’s employer;
- assessment period rules only apply to that section;
- pension scheme status notices refer to the status of that section’s employer; and
- the Pension Protection Fund will only assume responsibility for that section.
The Pension Protection Fund must obtain a valuation of the section rather than the whole pension scheme.
Multi-employer sections
There are three types of multi-employer sections, with each section being considered as a pension scheme in itself, ie segregated or non-segregated. The structure, on the withdrawal of a participating employer, may have:
Each of these is considered in more detail below.
Requirement for partial wind-up
In this type of section when a participating employer becomes insolvent, the pension scheme trustees must create a new section for that employer’s assets and liabilities, known as the ‘segregated part’ in regulations.
Essentially, a new single employer section is formed and is handled in a similar way to the single employer process. There are two differences:
- a valuation of the entire section is necessary; and
- once it is clear that the Pension Protection Fund must assume responsibility for the segregated part, where the binding valuation shows assets are less than the protected liabilities and a pension scheme rescue is not possible, a second valuation is needed. This is because the Pension Protection Fund is assuming responsibility for a proportion of the section’s assets and it is important to take into account any changes to the value of those assets during the assessment period.
No provision for partial wind-up
The Pension Protection Fund considers the section, not the whole pension scheme, as for a single employer section, but only if all the section’s participating employers have entered insolvency and the insolvency event is in relation to the last participating employer in that section – the last man standing approach.
The process is similar to that for single employer sections but with two main differences:
- an insolvency event will only be considered a qualifying insolvency event if, and only if, all other participating employers have previously already entered into insolvency proceedings;
- the Pension Protection Fund must only approve a pension scheme status notice when it receives a notice in respect of all the section’s employers. When all notices have been received by the Pension Protection Fund it will make a decision whether to approve the last notice.
There may be circumstances where, following insolvency events for one or more employers, there remains a solvent employer. If that employer then withdraws from the scheme and pays its section 75 debt (leaving only insolvent employers), trustees should make an application for the Board of the Pension Protection Fund to assume responsibility for the scheme. [Section 129 Pensions Act as amended by the Pension Protection Fund (Multi-employer Schemes) (Modification) Regulations 2005]
Option to segregate on partial wind-up
The trustees can decide whether to segregate the section in relation to one of the participating employers.
When an insolvency event occurs, an assessment period starts as if a segregated part has been created. If the trustees then decide not to exercise their option, they must send a notice to the Pension Protection Fund, the Pensions Regulator and the insolvency practitioner. The insolvency practitioner must then end the assessment period by issuing, in the normal way, a withdrawal notice. The section then continues to be treated as a multi-employer section with no requirement for partial wind-up.
Segregated part of a segregated pension scheme’s multi-employer section
Whenever a segregated part is created or there is an option to create one, the Pension Protection Fund may need to pay closer attention to:
- monitoring trustees – a higher level of monitoring may be needed on the whole pension scheme in areas such as investment management to ensure that investments relating to the segregated part are properly safeguarded and managed; and
- liaison with the Pensions Regulator – there may be increased dialogue to clarify the handling of this complex structure.
Non-segregated pension schemes
In a non-segregated pension scheme there is no separation of the assets and liabilities. Pension Protection Fund involvement depends on the pension scheme structure which, on the withdrawal of a participating employer:
- has no requirement for partial wind-up;
- has a requirement for a partial wind-up; or
- has an option for partial wind-up.
Each of these is treated in the same way as an equivalent type of multi-employer section (except that references to sections are to be read as references to pension schemes).
Created May 2006
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