How should voluntary organisations respond to the much-publicised problems facing final-salary pension schemes? Should we wind up our scheme, and can we do that and still be seen to be fair to our staff?
Many final-salary or defined-benefit pension schemes are experiencing financial difficulties (Third Sector, 13 March). The reasons include falling stock market returns, abolition of ACT tax credits from 1997, increasing longevity of members and the new FRS17 accounting standard. In addition, the Myner report on the subject of institutional investment proposed more stringent rules regarding the duties of trustees.
However, the financial press has criticised organisations winding up their schemes because employer contributions to new replacement money-purchase schemes are normally significantly lower.
There are generally three options available to employers in these situations.
The first is to keep the scheme open to existing and new members.The second is to keep the scheme open to existing members but offer a money-purchase scheme to new joiners. And the third is to wind up the scheme and offer a money-purchase scheme.
Whichever option is selected, the trustees should check the scheme rules to establish how to deal with the benefits that have accrued in the scheme.
The most common destination for funds transferred as a result of a wind up is a bulk section-32 buyout bond, avoiding the requirement for individual advice to members. This contract retains occupational pension legislation but keeps the member's options open. Normally a three-month consultation period is offered to members so that they can seek independent financial advice.
The other option normally allowed within most scheme rules is a non-profit deferred annuity. This is an ideal solution for members because it guarantees the benefits in the same format as the final salary scheme. However, it is problematic because it the most expensive option for winding up a scheme and because there are a limited number of providers.
Because this is a very sensitive issue for employers and employees alike, it is essential that companies and trustees obtain professional advice before making any decisions. Similarly, advisers should always be conscious that one person could represent three different class of client simultaneously: director, trustee and member. They should therefore be clear about the capacity of the person they are advising at all times.
Stephen Bubb is chief executive of the Association of Chief Executives of Voluntary Organisations (ACEVO).
Send your questions to: email@example.com.