Frequently Asked Questions

What is a Statutory independent trustee?

Where a sponsoring employer has gone into liquidation, administration or receivership there is a legal requirement for the insolvency practitioner to inform the trustees, the Pensions Regulator and the Board of the Pension Protection Fund of its appointment. The Pensions Regulator must then consider appointing an independent trustee from the Regulator's register. Additionally, new provisions of the Pensions Act 2004 allow trustees, the employer or any member of an ongoing scheme to apply to the Pensions Regulator for the appointment of an independent trustee.

What is an 'ordinary' independent trustee?

The two types of appointment explained above are both statutory appointments which are made by the Regulator under legislation. An independent trustee can, however, also be appointed to an ongoing scheme at any time: such appointment is not done under legislation and is an 'ordinary' appointment.

Briefly, to be "independent" a trustee must :

• have no interest in the assets of the employer or of the scheme, other than in their role as trustee of the scheme; and
• not be connected with, or an associate of, the employer or the Insolvency Practitioner or the Official Receiver.

What does winding-up mean?

When contributions cease and a pension scheme is terminated the "winding-up" process begins. Briefly, this means that the assets in the scheme are used to secure (in accordance with current legislation) as much of each member's benefit that can be afforded, usually by buying an annuity policy from an insurance company, or transferring benefits into another pension scheme. The scheme trust can then be 'dissolved'. When the winding-up is completed the scheme no longer exists and the members receive benefits from an insurance company or other pension scheme instead.

Why does winding-up take so long?

The time it takes to complete the winding-up process varies from scheme to scheme. There are a number of factors that have the potential to delay the process. Some of the main ones are:

• recovery of unpaid contributions;
• scheme funding levels; if there is a deficit then this shortfall becomes a debt on the employer;
• outstanding complaints to either the Pensions Regulator, TPAS or the Pensions Ombudsman;
• queries regarding the reconciliation of contracted-out benefits;
• data discrepancy issues in either the employer's or administrator's records;
• non-compliance with Pensions Act 1995 and Pensions Act 2004;
• time taken to liaise with insurers on buying out benefits.

How much longer will it take?

It is extremely difficult for the trustee to provide an exact timescale for the conclusion of the winding-up process. This is because there are many stages to the process and we rely heavily on external assistance to complete these.

What will happen to my deferred pension benefits when the scheme is wound-up?

There are usually quite a few stages to go through in the winding-up process before members' benefits can be secured. However, once this stage has been reached the trustees will write to you confirming what your benefit entitlement is and also the options available to you. Generally speaking you will have a choice of the following options:

• depending on your age, retirement or early retirement;
• a transfer to another pension arrangement, such as your new employer's scheme, personal pension or a stakeholder pension arrangement;
• the purchase of a deferred annuity or buy-out contract so that your benefits will be provided under an insurance policy in your own name when you reach your normal retirement age.

Different provisions apply if a scheme is in a "PPF assessment period". (Please refer to later questions).

Can I transfer my benefits out of the scheme now?

You are allowed to transfer the cash equivalent of your pension benefits to another Inland Revenue approved pension arrangement, such as your new employer's scheme, a personal pension or a stakeholder pension. The cash equivalent is calculated by the trustees and their advisors. It is the trustees' duty to treat all members fairly when allocating scheme assets. Where a scheme's funding position is not known, or the trustees are trying to obtain further assets (such as unpaid contributions or a debt from the employer), it is unlikely that you will be able to transfer out until these issues have been resolved. If there is a shortfall in scheme funding, your transfer value may have to be reduced. Also, it may be cost effective to deny individual transfers at certain stages of the winding-up process.

There are restrictions on transfers if a scheme is in a "PPF assessment period". (Please refer to later questions).

Can I take early retirement?

The trust deed and rules (which govern a pension scheme) will state any rights you have to take your pension before your normal retirement age. The trustees' consent may be required in some schemes to a member's request to take early retirement. The trustees may not be able to agree to early retirement immediately, particularly when the funding position of the scheme is unknown, or there is a shortfall. This is because where a scheme is underfunded, it is only when winding-up is almost finished that the trustees will know exactly your share of the scheme assets. Only then can your early retirement pension be calculated accurately.

Different provisions apply on early retirement if a scheme is in a "PPF assessment period". (Please refer to later questions).

I am about to reach my Normal Retirement Date. How will the winding-up process affect my pension?

Due to the ongoing responsibilities of the trustees and the funding level of the scheme it may not be possible to provide you with your full pension benefits at the date you retire. This is because of how the law requires the money in the scheme to be shared out - see the next question for details. Instead you will be paid an interim reduced pension.

As soon as the final funding level of the scheme is known the trustees will be able to finalise your pension and it may be increased (or further reduced) accordingly.

Different provisions will apply if the scheme is in a "PPF assessment period". (Please refer to later questions).

What is the Pension Protection Fund?

The Pension Protection Fund ("PPF") is a fund run by the Board of the PPF. This is a statutory corporation which was established under the Pensions Act 2004 and commenced on 6th April 2005.

The PPF was established to pay compensation to members of eligible final salary schemes, when the sponsoring employer becomes insolvent, and where there are insufficient assets in the pension scheme to cover PPF levels of compensation.

For further information, see the PPF website at www.pensionprotectionfund.org.uk

What are PPF Compensation Levels?

Broadly speaking, the PPF will provide the following benefits:

• Pensioners and individuals who have reached their scheme's normal pension age, or irrespective of age, are in receipt of a survivor's pension, or an ill-health pension will receive 100% of their benefits.
• Non-pensioners and other early retirees will receive 90% of their benefits, subject to a cap of (currently) £25,000 per annum.
• Benefits accruing from pensionable service earned on or after 6th April 1997 will be increased each year in line with the Retail Prices Index, capped at 2.5%. No other increases are due.
• Spouse's benefits will generally be provided at 50% of the member's pension (unless the scheme makes no provision for spouse's benefits).

What is the PPF assessment period?

If a qualifying insolvency event occurs in relation to an employer of an eligible final salary scheme, an assessment period will commence. During this time, the PPF will decide whether or not to assume responsibility for the scheme.

The PPF must determine whether the scheme can be rescued, and whether it has sufficient assets to secure benefits which are at least equal to the PPF compensation levels. If either of these applies, the PPF will cease to be involved with the scheme. If neither applies, the PPF will assume responsibility for the scheme.

An assessment period will last for a minimum of one year. During this time, the scheme will continue to be administered by its trustees, subject to various restrictions.

During an assessment period, the trustees may generally only pay a transfer value where the member has requested and accepted it in writing before the commencement of the assessment period, and has chosen a scheme to accept the transfer.

Additionally, restrictions apply to requests for early retirement during an assessment period. If the scheme rules permit early retirement, the trustees must calculate the member's entitlement under the scheme rules and the amount that the member would receive under the PPF. They may then grant a pension of the lower of the two amounts.

If a member reaches normal pension age during an assessment period, the trustees must establish the pension the member is entitled to under the scheme rules, and then make any necessary reductions to ensure the pension does not exceed the PPF benefit levels.

What are the Statutory Priorities?

For final salary schemes, Section 73 of the Pensions Act 1995 (as amended by the Pensions Act 2004) governs the priority order in which members' benefits are provided when a scheme winds-up. For schemes which wind-up on or after 6 April 2005, the priority order has been changed to tie in with the PPF. This means that the PPF equivalent benefits are to be provided in priority to additional voluntary contributions ("AVCs") calculated on an 'added years' basis (i.e. final salary), but excluding any money purchase AVCs, with any remaining benefits (i.e. a top up over the PPF benefits) ranking afterwards.

Can I take my benefits as a cash lump sum?

It is a legal requirement that the benefits you have earned under the scheme are used to provide you with benefits on your retirement, and at retirement you may take a cash sum (currently free of tax).

However, some members will have what is called a "trivial pension". This is where their benefit under the scheme (and any other pension schemes of the same employer) is relatively small. From 6th April 2006, ("A-day") under the new simplified pensions tax regime, it will be possible to convert (i.e. take as a cash lump sum) the entire pension where the total value of a member's benefits, whether already in payment or not, is less than 1% of the "lifetime allowance" then in force (i.e. the single lifetime allowance that will apply to all pension arrangements from A-day). This has been set at £1.5m for the 2006/2007 tax year. In these circumstances the Inland Revenue will allow you to convert the entire pension, subject to the deduction of income tax.

What is the Internal Dispute Resolution Procedure?

This is a formal procedure for the resolution of disagreements between members and trustees concerning the scheme. Further details will be provided to you in the communications you receive from Pitmans Trustees Limited.

For further information on other sources of pensions information/advice please refer to the section Regulatory Bodies.

What if I paid AVCs (Additional Voluntary Contributions)?

Additional Voluntary Contributions (AVCs) are extra contributions you made to provide additional benefits from the scheme. In the statutory priorities, any AVCs calculated on an added years' basis will rank after the PPF benefits.