Advice needed re Final Salary Closure

bb999

My employer wants to buy everybody out of our company final salary scheme because it is only 64% funded at the moment. About 3 years ago the scheme was frozen and no further payments in were allowed.

We have been given 4 options:
1) Keep money in final salary scheme, but this is a huge financial burden to the company which could cause it to close.

2) Transfer to another scheme, and the employer will make up the shortfall in transfer value AND add another 10% as a sweetener. We would therefore get 110% of our notional transfer value.

3) Transfer the 64% to another scheme and take the rest (effectively 46% including the sweetener) as cash.

4) Transfer 100% and take the sweetener as cash.


3 & 4 sounded good at first, but I believe since January this has been taxable so suddenly it loses some of it's appeal.

Any advise as to what I should do?

Approx figures are £80k including the 10%.

Where is the best place to invest. Our current scheme is with Scottish Widows and they have agreed that if we invest with them they will drop their annual charge to approx 0.7%

I quite fancy investing in property, but can this be done under the banner of a pension, thus avoiding tax?

All help will be gratefully received.

Debt_Free_Chick

What do the Trustees say about the funding of the final salary scheme?

When was the last valuation of the funding status?

Have the Trustees agreed a Schedule of Contributions with the employer?

If you take option (1) there is now a better chance than ever that the funding position will improve. The Trustees have to agree a plan with the Company that will get the scheme 100% funded over a period of time - that will involve the Company making extra contributions.

All the Company is trying to do is to get the liabilities down, to minimise these extra funding contributions. The Company can't abandon the scheme altogether - they would have to make the funding up to 100% to do that.

Is the company saying that the scheme will close? Or that the company will fold?

You need more information, IMHO.

dunstonh

I quite fancy investing in property, but can this be done under the banner of a pension, thus avoiding tax?

With Reits and unit trusts it can but not actual property itself (unless you are looking at commercial property for your own business).

Scottish Widows have a few good property funds. They are available on the whole of market product but the scheme you are being offered may be cut down to limit the investment options.

chesky369

The Trustees of the scheme are forbidden to allow a pension to endanger the existence of the company - therefore you should contact them to see what their opinion is on this. You can't go just by rumour or by a vague statement by the employer.

MrChips

chesky369 wrote: »

The Trustees of the scheme are forbidden to allow a pension to endanger the existence of the company - therefore you should contact them to see what their opinion is on this. You can't go just by rumour or by a vague statement by the employer.

Are you sure about this? The Trustees' raison d'etre is to ensure the benefits promised are paid as per the Trust Deed. Of course they would rather not endanger the company who is funding the scheme but if it is a choice between seriously risking the security of the benefits accrued or risking the future operation of the company, they are obliged to protect the benfits.

Debt_Free_Chick

I wouldn't go as far as to say that the Trustees are forbidden from endangering the existence of the Company. As a general point of principle I am inclined to agree with Mr Chips in that the primary concern of the Trustees is to act in the best interests of members. Ever since Cargill vs Scowan in (?) 1985(?), the best interests of members has been defined as their "best financial interests". That can extend beyond their financial interests in the scheme (i.e. their benefits) and be interpreted to include their employment prospects, as well.

So it would be imprudent for Trustees to simply ignore the fact that the Company could go out of business, if it were forced to fund the scheme to 100% within an unreasonable timescale - losing jobs could be viewed as "not acting in the best financial interests" of the members. This is a complex area of trust law and will only say that the Trustees are required to consider this - and not necessarily act any differently, having considered the possibility. They may well decide that if jobs are to go, then that enhances the need to protect pensions.

Overlaying all of this is the new funding regime and in particular, the Regulator's Code of Practice. In particular, see pages 34 onwards regarding the recovery plan, the matters that the Trustees must take into account (the company's finances, business plans and credit rating) and the ability of the Trustees to take some contingent security, such as a charge over any of the employer's assets.

Trustees are in a very strong position today, regarding the funding of DB pension schemes. They are very much in the driving seat as - if they fail to agree a Recovery Plan (to fund the scheme, adequately) with the employer - the Trustees must report the matter to the Regulator and HE will impose a solution, if needs be. He has wide ranging powers as described under Acting against avoidance.

So far as the security of DB schemes is concerned, we are now operating in a very different environment!

Finally, the offer to get out of the DB scheme - and the cash sweetener - will have been offered by the Company, not the Trustees (as they no power to do this).

I would want to know about the discussions the Trustees have had with the Company regarding funding of the scheme .....

bb999

Just to clarify slightly:
The company has not said that they will close but HAVE said that the amount needed to bring the scheme to 100% would be a crippling amount.
They need to pay in between £80k & £100k per month for the next 10 years to get things straight, and as the company only makes profits of approx. £250k per year this is an an almost impossible expectation.

It is a family owned company and all but 1 of the trustees are also company directors, so they will not want to do anything to put the company at risk.

bb999

Debt_Free_Chick wrote: »

Finally, the offer to get out of the DB scheme - and the cash sweetener - will have been offered by the Company, not the Trustees (as they no power to do this).

I would want to know about the discussions the Trustees have had with the Company regarding funding of the scheme .....

You will see from my above answer - they are to all intents and purpoes the same people.

Debt_Free_Chick

bb999 wrote: »

You will see from my above answer - they are to all intents and purpoes the same people.

So, they have to perform two entirely separate roles. Firstly, as Directors acting in the interests of the Company and secondly, as Trustees acting in the interests of the pension scheme members.

It will be interesting to see whether, as Trustees, they report themselves (as the Company) to the Pensions Regulator, should they fail to reach an agreement on the funding plan. :rolleyes:

welshtony

As members you now have pretty strong protection, so don't do anything rash.

The first thing I would do would be to talk to all the other members and try to establish some sort of action committee to negotiate and protect your interests (assuming there's no union involvement; if there is, talk to your union).

Is the a Member Nominated Trustee? If not, is there a vacancy that you can request be filled?

There are pretty severe restrictions on what a company can and can't do with pension deficits now, but, in practical terms, if the company can't afford to pay, you may have to make a decision as to how far you push for any improvements.

Some simple action steps:

- get the last actuarial valuation report
- get the last audited accounts for the plan
- ask for a copy of the current scheme rules and trust deed (it will be incomprehensible, but will put the trustees and company on notice that you are taking a serious interest)


There's excellent guidance on the Pensions Regulators site, here's his advice on inducement offers:

http://www.thepensionsregulator.gov.uk/guidance/inducementOffer/index.aspx

Good luck!

Debt_Free_Chick

welshtony wrote: »

There's excellent guidance on the Pensions Regulators site, here's his advice on inducement offers:

http://www.thepensionsregulator.gov.uk/guidance/inducementOffer/index.aspx

Excellent! I hadn't spotted that (and given my professional job, I should jolly well have known about it!!! :eek: )