Winding up requires that the pension fund’s assets are ascertained, got in and distributed in the manner required, for the benefit of the present and prospective beneficiary. The trust should make provision for shortfalls and surpluses. Costs and expenses of winding will have priority, subject to provisions to the contrary. The trust deed should provide generally for the trustees’ powers in a winding up.
The pension scheme provisions take effect, subject to the terms of the legislation. Priorities in relation to matters not specifically governed by the Pensions Act are governed by the trust deed and pension rules. The pension scheme rules may be amended to conform with the legislation. In any event, the scheme must take effect subject to the mandatory provisions of the legislation.
The rights and liabilities under the scheme are fixed on commencement of winding up. The trust deed will normally determine when this occurs. The trustees may be able to select the relevant date. The deed is likely to specify how liabilities and obligations are to be met.
A funded pension scheme may be wound up (among other reasons) if the employer
- goes into liquidation;
- is bought by another company that decides not to continue the scheme;
- fails to make contributions to the scheme within a set period; or
- notifies the trustees that it intends to stop contributing to the scheme.
The Revenue Commissioner’s rules require that future benefits shall be secured by payments to PRSAs, annuities, life assurance products or other approved schemes. The Pensions Act allows trustees to secure and give effect to members benefits by making a transfer to another approved scheme, a buyout bond or, subject to certain conditions, making payments to other pension trustees, managers, etc. This may be done, notwithstanding the rules of the pension scheme. The consent of the pension beneficiary is not required.
The scheme’s assets may already comprise pension policies with insurers, which can be transferred to another entity.
In the case of retired beneficiaries, transfers to ARF may be made if the employee would qualify to take an ARF. An annuity may be purchased for the benefit of employees where benefits are being provided from the pensions own funds.
In the case of future and prospective pensioners, there may be a transfer to a new scheme, a buyout bond or a PRSA. The buyout bond is a policy between the member and a life assurance company which replaces and discharges the scheme’s liability. Current scheme members and persons with deferred pensions may be offered a choice in relation to the manner and nature of the buyout. There may be a choice in relation to the insurer and the policy.
Solvency and Winding Up
A scheme may be wound up notwithstanding that it is solvent. It may be wound up simply because it has run its course by its terms. This may occur where the scheme is for a particular purpose or period. There may be a change in employer, or the existing employer may cease to make contributions or cease to make the scheme available.
Employers will commonly reserve the right to cease making contributions. Usually, there is a contractual right only, for employees to be members of the scheme as it exists, if it exists. The cessation of the scheme may have industrial relations implications.
The employer may cease to make contributions without the scheme being wound up. The discontinuance of contributions may be temporary or permanent. Contributions may cease temporarily where there is overfunding. They may cease where the employer exercises a right to cease making contributions due to financial and economic considerations. The terms of the scheme documentation may require a period of prior notice to the trustees.
The employer entity may become insolvent and be itself wound up. This may precipitate the winding up and closure of the scheme.
There may be outstanding contributions due from the employer to the scheme, which enjoy priority in the insolvency. There may, however, be no employer funds available, in which case, the State fund may be liable to pay the shortfall.
A scheme may be partly wound up on the reconstruction of the employer. This may arise, for example, where the scheme is for the benefit of a group of companies, and one entity leaves the group, becomes insolvent or ceases to make contributions. In the same way, there may be a multi-employer group scheme, so that if one employer is wound up, or ceases to make contributions, a partial winding up of the scheme may be required.
There is no requirement to wind up the scheme, simply because the sponsoring employer is insolvent. The scheme trustees may be a creditor of the employer in relation to outstanding contributions and, to the extent that the employer has made any further commitment. However, there is generally no obligation on the employer to keep the scheme going, even in the absence of insolvency, so that the employer’s future obligations will usually cease.
The scheme documents may provide for what occurs, if the employer ceases to make contributions or becomes insolvent. The trust deed usually allows for the closure of the scheme. If it does not have such provisions, there may be a provision which allows the variation of the terms of the scheme, so as to allow its closure.
The scheme may simply become frozen or closed in relation to employer contributions. It may continue to be frozen, be wound up or be transferred to another pension entity. Where a scheme becomes frozen, new members will not be admitted. The underlying investments continue to accrue for the purpose of meeting future liabilities to employees for benefits under the scheme.
Information relating to the pension related aspects of the winding up must be disclosed to members in accordance with the general disclosures regulations, the requirements of the trust deed, good practice and the trustee’s duty of care. This includes information in relation to the members’ rights, entitlements and options and the way in which they will be funded and dealt with on a winding up. Information must be supplied as to how any shortfall or surplus will be applied.
Particulars of the winding up provisions must be given within 12 weeks of the decision to wind up, or when the trustees became aware or ought to become aware of an event which requires winding up. The notice must be made to members, the Pension Board, pensioners, future pensioners (and their dependents and spouses who are or may be entitled to pension scheme benefits) and trade unions representing the members.
The Pensions Act provides that trustees or other decision-makers may not exercise a discretion in relation to the payment of surplus scheme assets to the employer or a reduction in benefits to beneficiaries in the event of a shortfall, unless the members have been given the opportunity to make observations to the trustees or employer, and due consideration has been given to them. The commencement of the legislation was postponed.
An employer may fail to make contributions due to the pension scheme. It may fail to manage and segregate the scheme’s assets from its own assets, even where there are legal structures in place. This occurred in some notorious cases in the past (in particular in the case of the Mirror Group pension), where the employer in effect raided the pension fund. Issues of fraud and criminal liability may arise in such cases.’
Where contributions to the scheme have been made and are earmarked, they are effectively part of the scheme’s assets and are held under constructive trust. This arises under general principles of equity.
Under the general insolvency rules, the Official Assignee, bankruptcy trustee or liquidator may recoup sums wrongly paid to third-parties or improperly misapplied by the insolvent person or company. Pensions legislation allows the Pensions Authority to apply for an order for payment of unpaid employee contributions, which have been actually deducted.
The trust document or other definitive pension instrument should provide for winding up and the distribution of pension funds. Subject to the rules of the scheme, the costs and expenses of winding up have priority. Any provisions in the rules are subject to the mandatory provisions in Revenue and Pensions legislation.
The Pensions Act provides for priorities on winding up of an insolvent scheme. The Revenue rules provide for securing benefits.
The legislation in relation to priorities has been amended in the last decade, as a consequence of a number of apparent injustices which were highlighted during the financial crisis. The pre-existing provisions gave priority to existing retired pensioners over future pensioners. This position has been amended in the manner set out below.
Priority of entitlement is less of an issue in the case of a defined contribution scheme, provided that all the contributions have been made. Entitlements under the scheme are usually proportionate to the contributions made by employer and employees. Each member’s entitlement should be specifically identifiable.
Priorities if Insolvent and Employer Solvent
The 2013 amending legislation provided for six levels of priority as follows
- first priority is given to additional voluntary contribution benefits and defined contribution benefits;
- second priority is given to pensioner benefits up to £12,000 p/a; if the pension is €12,000 p/a or less, it is the greater of €12,000 and 90 percent of the pension; if the pension is over €12,000 p/a and less than €60,000 p/a, it is the greater of €54,000 and 80 percent if the annual pension is €60,000 or more; Post-retirement increases are excluded;
- third priority is given to 50 percent of current and former scheme members’ benefits, excluding post-retirement increases;
- fourth priority is given for remaining pensioner benefits, excluding post-retirement increases;
- fifth priority is given to remaining current and former scheme member benefits, including post-retirement increases;
- sixth priority is given to remaining pensioner, current and former scheme members benefits, including post-retirement increases.
Priorities if Insolvent and Employer Insolvent
Where the scheme is insolvent and its assets are distributed on a winding up, where the employer is insolvent, there are seven level of priorities as follows
- first; additional voluntary contribution benefits and defined contribution benefits;
- second; to 50 percent of pensions or benefits;
- third; to 50 percent of current and former scheme member benefits;
- fourth; to pensioner benefits up to €12,000 excluding post-retirement increases;
- fifth; to remaining pensioner benefits, excluding post-retirement increases;
- sixth; to remaining current and former scheme member benefits, excluding post-retirement increases;
- seventh; to remaining pensioner current and former scheme member benefits, including post-retirement increases.
Reduction of Benefits
The Pensions Act limited the extent to which pension annuities may be reduced. A reduction was permissible only in limited cases, including commutation of all or part of a pension, surrender in favour of a pension for a spouse or dependent, end of dependency relationship for children, reduction by reference to a cumulative income targeted by reference to the pension plus the State contributory pension.
Reduction in other pensions may be taken into account in calculating the pension amount. There are provisions which seek to protect payments in relation to pensions integrated with the State pension so as to prevent prejudice, where increases in the State Pension are larger than increases in the scheme pension.
The insolvency provisions introduced during the financial crisis permit for reduction of benefits in the case of insolvent schemes. The legislation was amended on a number of times during the financial crisis. The State was required to make provision for some shortfalls, pursuant to EU court confirmations of the effect of EU Directives. These matters are dealt with in a separate chapter.
The issue of ownership of pension surpluses was prominent during the long investment boom when pension assets values sometimes exceeded prospective liabilities. Questions may arise as to entitlement to the (projected) surplus.
In the first instance, the matter is dealt with by the trust deed. Under default trust law, if no provision is made and the monies are sufficient to fulfil the trust obligations, then the surplus is held in trust for the person who contributed them, commonly the employer.
The scheme documents may provide for the payment of surplus funds to the sponsoring employer. This may arise if the funding for benefits on the date of termination exceeds the amounts required for benefits or permissible under Revenue requirements. Funds received from the pension scheme which are paid back to the sponsoring employer, are taxable receipts to the employer.
A surplus or shortfall will not generally arise in the case of a defined contribution scheme, provided that the Revenue maxima are not exceeded. Under a defined contribution scheme, the member’s rights and entitlements are generally equal to the total contributions made by the employer and the member. The surpluses and shortfalls of expected investment performance will be at the risk of members.
Funding requirements apply to defined benefit schemes on an ongoing basis. The surplus or shortfall / liability under a defined benefit scheme, may not crystallise until winding up. At any given time, many scheme benefits are future and contingent. The surplus or shortfall does not exist as such until crystallised by a full winding up.
Prior to winding up, there may be projected shortfalls and surpluses based on actuarial assessment of the underlying investments and obligations to members. The sponsoring employer may be obliged to fund projected shortfalls. If there is a projected surplus, the employer may be able to take a so-called “contribution holiday” for such period as may be justified.
The question of entitlement to the surplus may arise on winding up. The entitlement to the surplus is primarily defined by the terms of the trust deed. Revenue requirements provide that if the maximum permissible benefits are provided for, the surplus may not be applied further for the members’ benefit, without jeopardising the tax-exempt status of the scheme. In this case, the surplus may be repaid to the employer, if it has financed the scheme.
There may be provisions in the trust instrument for increases in the benefits, where there are surplus funds above those required to finance the promised benefits, provided that they are less than maximum permissible under Revenue rules. This may be predetermined, or it may be a matter for the trustees to decide. The consent of the employer may or may not be required.
Conflicts of Interest
Where the company is also a trustee, issues of conflicts of interest may arise in relation to a discretionary application of a surplus. Fiduciary considerations arise.
The conflict is particularly pointed if the corporate employer is in an insolvency process (where its assets, in effect, must be applied for the benefit of its creditors). A liquidator may be precluded from exercising the power, due to a conflict of interest. In this event, a court order may be required to exercise the power.
The decision to increase benefits may raise issues, similar to those applicable under a discretionary trust. The employer’s evolving duties to act in good faith in dealing with the employee is relevant. The trustees owe fiduciary duties to the members and must act in an equitable manner. The members may have a reasonable expectation in the circumstances, which will affect the exercise of Court’s equitable jurisdiction, even if there is no strict entitlement to the surplus.
References and Sources
Irish Pensions Law & Practice Buggy, Finucane & Tighe 2nd Ed (2005)
Pensions; Revenue Law and Practice (ITI) McLoughlin, Dolan et al (2013)
Trustee Handbook the Pensions Authority 5th Ed 2016
Statutory Guidance the Pensions Authority (Various)
Pensions Law Handbook 12 Ed Nabarro Nathanson Bloomsbury
Corporate Insolvency 6e: Employment & Pension Rights (6th Revised edition)
Occupational Pensions (Subscription) Lexis Nexis
Pensions Law and Practice with Precedents (Subscription) Sweet & Maxwell
Sweet & Maxwell’s Law of Pension Schemes (Subscription)
The Guide for Pension Trustees World Economics Ltd
The Guide for Pension Trustees website, you can:
Tolley’s Pensions Law Looseleaf Service (Subscription)
Pensions Act, 1990
Pensions (Amendment) Act, 1996
Pensions (Amendment) Act, 2002
Pensions (Amendment) Act, 2006
Social Welfare and Pensions Act, 2005 (Part 3)
Social Welfare Reform and Pensions Act 2006
Social Welfare and Pensions Act 2007
Social Welfare and Pensions Act 2008
Social Welfare (Miscellaneous Provisions) Act 2008
Social Welfare and Pensions Act 2009
Social Welfare and Pensions (No. 2) Act 2009
Social Welfare (Miscellaneous Provisions) Act 2010
Social Welfare and Pensions Act 2010
Social Welfare and Pensions Act 2011
Social Welfare and Pensions Act 2012
Social Welfare and Pensions (Miscellaneous Provisions) Act 2013
Social Welfare and Pensions Act 2013
Social Welfare and Pensions (No. 2) Act 2013 49/2013
Social Welfare and Pensions Act 2014
Social Welfare and Pensions (No. 2) Act 2014 41/2014
Social Welfare (Miscellaneous Provisions) Act 2015 12/2015
Social Welfare and Pensions Act 2015 (Part 3)