Closure To Accrual

A decision can be taken to close a final salary pension scheme not only for new members, but also for those who already participate.

Final salary pension closure will slow the pace of liability growth (although for most final salary pension schemes the value of the liabilities does continue to grow for many years after pension plan closure).

In many circumstances closure of a pension scheme can also result in a reduction in liabilities disclosed in the company accounts under the various accounting standards FRS17, IAS19 and FAS87.

Delicate negotiations between the employer and trustees are often required if an employer is proposing the closure of a pension scheme with both sides needing independent actuarial advice on the pension scheme closure proposal.

Spence & Partners has extensive experience of advising employers and trustees in relation to pensions closure ranging from smaller pension schemes operated by SMEs to large schemes operated by FTSE 250 companies.

Key elements of advice are likely to include:

Considering Alternatives to Pensions Closure

Business circumstances may require closure or an employer may be determined to hop on the bandwagon to limit pensions risk. Either way, employers need to avoid getting carried away because the question will come from employees, trade unions or the pension scheme trustees themselves – have you considered the alternatives? An employer who has not will appear both uncaring and possibly a bit foolish.

We have developed a unique modelling tool which allows employers to consider options and to design a new arrangement which best meets their needs and the needs of their employees. The modelling tool can take into account benefits already built up, state benefits and multiple variables of contributions and benefits in a new arrangement all of which can be linked in to bespoke communication material to assist in smoothing any transition. It is possible to model any common replacement benefit structure including Career Average Revalued Earnings, money purchase, limiting pensionable salary increases, cash benefit etc.

Consideration of the Contractual Position of Closing a Pension Scheme

Legal advice must be taken on each and every variation of wording used in contracts of employment to determine the risk of a final salary pension being considered to be contractual.

Contracts of employment can be changed but the risk involved and the procedures that need to be followed are considerably more complex where there is a high risk that the pensions promise is contractual.

There may be certain situations where actuarially calculated compensation may be required prior to closing a pension scheme.

Consideration of the power of the trustees

It is essential to understand what power the pension scheme trustees can wield in thwarting or delaying an employer proposal to close a pension scheme to accrual. Pension scheme closure is the most controversial decision that employers are ever likely to take in connection with a pension scheme and the trustees may have strong personal views or even vested interests.

Depending on the structure of the power of amendment trustees may be able to block a closure proposal and, at the very least, are likely to argue for concessions on scheme funding or other matters in return for their agreement.

It is obviously vital for the trustees to address any potential conflict of interest if an employer makes a proposal to close a pension scheme and a change in structure of the trust board may be necessary including potentially the appointment of an independent professional pension scheme trustee. Spence & Partners’ professional trustee company Dalriada Trustees Limited is highly experienced in acting as an independent trustee in circumstances where a proposal for scheme closure needs to be considered.

Consideration of the quality of data held

When considering the impact of the closure of a pension scheme, employees need information on how it affects them as individuals. Spence & Partners normally recommends the provision of individual benefit projections for each and every pension scheme member.

To provide individual projections for all pension scheme members illustrating the impact of pension scheme closure is also demanding and the data should be audited at the start of the planning process to identify if any remedial work will be required before member projections can be provided.

If you are an employer wishing to close a final salary pension scheme or a pension trustee needing to consider such a proposal please contact either Brian Spence or Neil Copeland for an informal discussion.

A decision can be taken to close a final salary pension scheme not only for new members, but also for those who already participate.
Final salary pension closure will slow the pace of liability growth (although for most final salary pension schemes the value of the liabilities does continue to grow for many years after pension plan closure).
In many circumstances closure of a pension scheme can also result in a reduction in liabilities disclosed in the company accounts under the various accounting standards FRS17, IAS19 and FAS87.
Delicate negotiations between the employer and trustees are often required if an employer is proposing the closure of a pension scheme with both sides needing independent actuarial advice on the pension scheme closure proposal.
Spence & Partners has extensive experience of advising employers and trustees in relation to pensions closure ranging from smaller pension schemes operated by SMEs to large schemes operated by FTSE 250 companies.
Key elements of advice are likely to include:
Considering Alternatives to Pensions Closure
Business circumstances may require closure or an employer may be determined to hop on the bandwagon to limit pensions risk. Either way, employers need to avoid getting carried away because the question will come from employees, trade unions or the pension scheme trustees themselves – have you considered the alternatives? An employer who has not will appear both uncaring and possibly a bit foolish.
We have developed a unique modelling tool which allows employers to consider options and to design a new arrangement which best meets their needs and the needs of their employees. The modelling tool can take into account benefits already built up, state benefits and multiple variables of contributions and benefits in a new arrangement all of which can be linked in to bespoke communication material to assist in smoothing any transition. It is possible to model any common replacement benefit structure including Career Average Revalued Earnings, money purchase, limiting pensionable salary increases, cash benefit etc.
Consideration of the Contractual Position of Closing a Pension Scheme
Legal advice must be taken on each and every variation of wording used in contracts of employment to determine the risk of a final salary pension being considered to be contractual.
Contracts of employment can be changed but the risk involved and the procedures that need to be followed are considerably more complex where there is a high risk that the pensions promise is contractual.
There may be certain situations where actuarially calculated compensation may be required prior to closing a pension scheme.
Consideration of the power of the trustees
It is essential to understand what power the pension scheme trustees can wield in thwarting or delaying an employer proposal to close a pension scheme to accrual. Pension scheme closure is the most controversial decision that employers are ever likely to take in connection with a pension scheme and the trustees may have strong personal views or even vested interests.
Depending on the structure of the power of amendment trustees may be able to block a closure proposal and, at the very least, are likely to argue for concessions on scheme funding or other matters in return for their agreement.
It is obviously vital for the trustees to address any potential conflict of interest if an employer makes a proposal to close a pension scheme and a change in structure of the trust board may be necessary including potentially the appointment of an independent professional pension scheme trustee. Spence & Partners’ professional trustee company Dalriada Trustees Limited is highly experienced in acting as an independent trustee in circumstances where a proposal for scheme closure needs to be considered.
Consideration of the quality of data held
When considering the impact of the closure of a pension scheme, employees need information on how it affects them as individuals. Spence & Partners normally recommends the provision of individual benefit projections for each and every pension scheme member.
To provide individual projections for all pension scheme members illustrating the impact of pension scheme closure is also demanding and the data should be audited at the start of the planning process to identify if any remedial work will be required before member projections can be provided.
If you are an employer wishing to close a final salary pension scheme or a pension trustee needing to consider such a proposal please contact either Brian Spence or Neil Copeland for an informal discussion.

We are making donations in 2011 to two charities, Marie Curie Cancer Care who provide end of life care to terminally ill patients, and Children 1st, who are one of Scotland's leading child welfare charities.

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