The first stage of a wind-up is likely to be the decision whether or not to wind-up. This section of the guidance discusses when to consider this question, and actions to take when faced with such a decision.
Who can trigger the winding up of a DC pension scheme?
The options for triggering the winding up of a scheme will be set out in the scheme rules. Every pension scheme has its own set of scheme rules, so there isn’t a single answer to this question.
The scheme rules are agreed when the pension scheme is first established and may be amended from time to time. They will set out how the scheme is to be administered, and what benefits will be provided.
The power to trigger wind up of the scheme under the scheme rules will usually rest with the trustee or employer. However, it’s also possible that some events may automatically trigger wind up of the scheme, for example if the employer becomes insolvent or stops paying contributions. When this happens you will need to refer to your scheme rules to find out if the scheme has automatically gone into wind up, or if you need to make a decision to wind up the scheme or to continue to run it as a closed scheme. A closed scheme is a scheme that is closed to new members. Depending on the scheme rules, it may or may not be able to continue to accept further contributions. The trustees’ role and duties continue for a closed scheme, until such time as it has been wound up.
If your scheme has automatically triggered wind up, the rest of this section will not be relevant to you. You can proceed to the next section of this guidance.
When to consider winding up your scheme
Along with the scheme's sponsoring employer, you should consider taking professional advice about the best option for your scheme members before deciding to wind up the scheme. When making this decision, questions to ask yourself include:
- Whether there are good reasons for winding it up – for example, the employer might want to merge it into another pension scheme, or replace it with a more cost-effective arrangement.
- Whether the scheme meets the standards set out in our code of practice 13 (which sets out governance standards for trustees of DC schemes) and other relevant guidance. If it doesn't, is it capable of meeting the standards in a timely and cost-effective way?
- Whether there are alternative arrangements available that would better meet the needs of employees or scheme members. For example, if you believe that your scheme is not delivering good value for its members but you can't make the changes needed to address this because the scheme isn't large enough for you to negotiate competitive charges, then you might want to work with the sponsoring employer to identify whether members could benefit from being transferred to another pension scheme. However, this will depend whether there are alternatives available that can provide a better service with a more competitive charging framework.
In some cases, for example where a scheme is not providing good outcomes for members, wind up may be in their best interests. There will, however, be some occasions where trustees think it will be best to run the scheme as a closed scheme – or decide, along with the employer, to maintain the scheme as an open scheme for some or all employees. An example might be where the scheme offers valuable guaranteed benefits – such as guaranteed annuity rates – that can't easily be duplicated in a new scheme or transferred into an individual buy out policy.
Actions to consider when deciding whether to wind up
Key activities you will need to undertake at this stage, assuming your scheme rules give you some discretion over whether or not a wind up takes place, are:
Review the scheme rules on triggering wind up
Find out how wind up is formally triggered, who has the power to trigger wind up and whether there is any power to continue to run the scheme as a closed scheme.
Consider who will meet the costs of winding up
Find out whether the employer has any obligation (under the scheme rules or otherwise) or willingness to pay these costs. For example, if the employer pays ongoing costs, but wind up costs would be deducted from members’ funds, you might decide it’s in members’ best interests to continue the scheme as a closed scheme (if they have that option). Costs of winding up can vary significantly depending on the size of your scheme and the nature of benefits provided. You should try to identify all costs before triggering formal wind up, but any agreement with the employer to pay the cost should account for the fact that costs may change as the wind up progresses.
Check that member data is accurate and up to date
Poor data can affect the cost and time required to wind up a scheme. You may therefore want to address any issues with data before winding up is formally triggered. You will want to check the following for each of your members:
- That you have accurate and up to date personal data, such as address, date of birth and national insurance number. If you have lost contact with any members, you will need to make all reasonable attempts to contact them. Read information on tracing members.
- That all member and employer contributions have been paid and invested, so that members' fund values can be accurately determined.
- That you have checked and reconciled all benefit data, so can accurately determine their benefits. This includes checking details of additional voluntary contributions and any unusual entitlements, such as a protected pension age (allowing retirement before age 55) or a protected tax free lump sum (of more than 25%).
Consider if there are any reasons why wind-up might not be in members' interests
For example, are there any valuable benefits / guarantees offered by the scheme that would not be easy to secure / reproduce in a different arrangement? If so you might want to explore the available options carefully with your provider and advisers before making a decision.
Another example might be if there are any penalties for early investment surrender, such as a loss of terminal final bonus. You will want to review the current investment surrender terms at an early stage to check for any such issues, and consider how they might best be managed.
You might also consider engaging with your members, where possible, in order to get a better view of their retirement objectives, as this could help you to reach a decision on whether wind-up would be in their interests.
Identify trustee policies in trustees' names
If the scheme winds up, any insurance policies you have bought to provide pensioner benefits and which are in the name of the trustee will need to be reassigned to the members. This takes time and may have a cost – you may wish to seek legal advice about how this can be done.
If wind up will be triggered automatically, or (after considering the above issues) you conclude that winding up a scheme is in the members’ best interests, you can start preparing for formal wind up.