When the Pension Protection Fund (PPF) recently committed to making its first ever payments in the UK as part of a compensation package worth £2.5 million to 210 former employees of textile manufacturer Chilton Scotland, it signalled the end of an 18 month exercise. The journey proved to be something of a voyage of discovery as processes were developed and approaches evolved to fill in the detail around the regulations. Having now reached the end of the road it does give us a chance to review what’s been achieved and see if any lessons can be learned.
Back in 2003 when Chilton became insolvent, the conventional wisdom was to commence the wind-up of the pension scheme. The Chilton trustees, however, decided to defer wind-up as such a step would definitely disqualify the Scheme from the PPF compensation package and they wanted to be totally sure how the PPF rules would actually work in practice. When viewed with hindsight this could seem like an obvious step however there was a lot of confusion at the time. Indeed right up until October 2004 the eligibility rules for the PPF were unclear. Many trustees just decided to immediately begin wind up of their scheme and unfortunately have been disadvantaged as a result. Fortunately in Chilton’s case the trustees were subsequently successful in petitioning for the liquidation of the company after April 2005 which ensured eligibility for the PPF.
Following the insolvency event in May 2005, a liquidator was appointed to wind up Chilton Scotland and the trustees assumed responsibility for the administration and management of the Scheme during the PPF assessment period. Because of the unique circumstances, the trustees felt it would be appropriate to bring the administration in-house so that the actions of the trustees, administrator and PPF could be more closely co-ordinated and that knowledge gained to be effectively shared. This ultimately proved to be beneficial.
At the start of the assessment period, the PPF assigned a case worker with whom the trustees drew up a management plan, set out a timetable and agreed budgets for work to be carried out. The working document was then updated and submitted by the trustees to the PPF on a monthly basis so that progress could be monitored. Early in the assessment period the trustees also reviewed the Scheme investment strategy.
One of the trustees’ first tasks was to check if any changes to the rules of the pension scheme had occurred over the past three years which may have resulted in an increase to the liabilities of the Scheme. Had there been any such changes, the trustees would be forced to disregard these and rely solely on the ‘admissible rules’ so that they could apply this data to calculate the appropriate PPF compensation levels for pensioners and deferred members.
The trustees also conducted a comprehensive review of all pensions in payment to determine if any members who had been provided with early retirement pensions, were still below the Scheme’s normal retirement age, as these would need to be cut back to the 90% level of PPF compensation.
As the trustees retained ongoing responsibility for the management and administration of the Scheme throughout the assessment period, they had to ensure that any members reaching normal retirement age during this period were paid their entitlement at appropriate PPF compensation levels.
It was also crucial during this period that the data inherited from the Scheme’s previous administrators was scrutinised to determine that member records were accurately held and benefits had been correctly paid when due. This involved undertaking a data and benefit audit for a sample of Scheme members.
However, when the results from this initial sample proved inconclusive, the trustees opted to embark on a more comprehensive data and benefit audit which revealed how various considerations, such as final salary pension and pensionable service, had been calculated. The trustees also incorporated as part of the audit a GMP (Guaranteed Minimum Pensions) reconciliation exercise, which is a requirement of the PPF during the assessment period. This proved to be a huge administrative task, but one which was vital for the HM Revenue & Customs to be satisfied that the GMPs were accurately recorded, maintained and secured. Although the PPF do not pay GMPs, the trustees used the GMP reconciliation exercise as an extra check on scheme membership, for example, members for whom the trustees had no records, appeared on the National Insurance Contributions Office cessation lists. These members then had to be traced so that the trustees could investigate if they were entitled to a pension benefit from the Scheme.
At the same time the trustees compiled an action log for the PPF which provided a full audit trail of all the activities undertaken by the trustees during the assessment period.
Following completion of the audit, and having kept Scheme members fully informed at every stage of the proceedings, the trustees then contacted all members to verify that all records of members’ personal details were accurate and then updated any necessary records. A full record for every member then had to be completed and supplied to the PPF in the format prescribed by the PPF scheme administrator.
The Scheme Actuary carried out a valuation (known as a “Section 143 Valuation”) to compare the assets against the “protected” liabilities, or the cost of securing benefits at PPF levels. The Chilton valuation received formal approval by the PPF in September 2005 – the first valuation to receive such approval. Following approval, the trustees contacted members to quote the level of compensation they would expect to receive. Members then had two months within which to query the figures, after which the Section 143 valuation became binding. Once this period had elapsed, the PPF then issued the transfer notice to discharge the trustees from their obligations and the PPF assumed responsibility for the Scheme.
One of the more time consuming issues to be addressed during the assessment period arose from the fact that the PPF will only assume responsibility for defined benefits assets. This meant that the trustees were required to deal with any money purchase assets or additional voluntary contributions (AVCs) outside the Scheme. This involved appointing an authorised financial adviser to secure the best terms possible in the market for the members’ money purchase funds.
The assessment process – which lasted for 18 months – proved to be considerably more complex than could have been anticipated, not least because in many areas there were no established procedures at the PPF and few templates to work from. Constant communication with the PPF caseworker was key to ensuring the smooth transition of the Chilton Scotland Pension Scheme into the PPF and secure compensation for members.
At the time of writing, most PPF procedures are now fully documented, and, together with its helpful website, this means that the process has now been sufficiently refined through experience to ensure that most schemes will have a much more straightforward passage through the assessment period. The trustees of the Chilton Scheme are however proud that the process was completed as quickly as it was under the circumstances a result achieved by a combination of commitment, management and close co-operation with the PPF who were immensely helpful throughout.