Generally, there are three reasons.

First, the scheme may be so mature that the sponsoring employer and trustees decide that it is more efficient to wind it up and deploy its assets to buy out the members' entitlements. Where this occurs, usually, the scheme will have been closed to new members for some considerable time and it may be that the majority of members have already retired on pension.

Secondly, pension deeds usually provide that where the sponsoring employer gets into financial difficulties (for example, where a receiver is appointed or the company goes into liquidation) an automatic wind up of the scheme will be triggered.

Thirdly, the employer sponsoring the scheme may decide that it can no longer afford to run the scheme, even in a modified format, and thus it needs to take steps to wind it up.

The facts leading up to the wind up of the scheme will undoubtedly influence the actions of the trustees and sponsoring employers giving effect to the wind up.

In big picture terms, the wind up process requires the scheme trustees to realise the scheme's assets and use them to meet the scheme's liabilities (i.e. members' benefits). If the value of the assets is less than the liabilities there will be a statutory abatement. Conversely, if the value of the scheme's assets exceeds the value of the liabilities a surplus on the wind up will arise. How this will be dealt with should be set out under the terms of the scheme's rules.

Ideally, before the wind up occurs a financial and legal review of the scheme's finances and governing documents should be carried out to establish what are the implications of the wind up; regarding the distribution of assets between the various categories of member, and also to ascertain the relevant powers and discretion of trustees. Where a deficit is likely to arise, depending upon the facts, it may be appropriate to communicate this (and its implications) to key members in advance of the actual wind up.

A pre wind up financial and legal review empowers the trustees and the sponsoring employer to manage the winding up process.

A legal review of the scheme's documents ought to establish if the trustees have the necessary powers to implement a smooth wind up and address their rights, if any, to ask the employer to meet the wind up costs and perhaps also the amount of any shortfall between the scheme's assets and its liabilities. Sometimes, a scheme's benefit structure may not be completely up to date and the documents may need to be updated to reflect any required changes. It is very important that the scheme's formal rules are up to date so that the trustees are authorised to pay the correct benefits to the relevant classes of members. If the benefits in the rules do not reflect what members are expecting to receive and have been notified they ought to receive (barring abatement due to underfunding) the trustees will be put in a difficult position when the scheme is wound up. Also, the scheme documents may need to be amended to give the trustees appropriate powers during the winding up process.

Preferably, a project plan should put in place in advance of the wind up. Its purpose is to identify the issues that arise and establish how they will be managed.

Where the wind up is to be orchestrated by the employer because it is not in a position to be able to afford to support the scheme any longer, due perhaps to a large deficit, it is essential that the scheme documents are reviewed to establish the rights of the trustees to serve a contribution demand notice on the employer. Some pension deeds empower trustees to do this. Where trustees have such a power to require the employer to pay whatever is the value of the deficit, if the trustees do not exercise this power they might be exposed to a breach of trust and a claim for breach of trust by their members.

Where an employer is aware that trustees have such a power, it needs to be able to address the consequences of the service of such notice with the trustees and take appropriate legal advice.

It will also be necessary to determine what are the formal procedures which trigger the wind up. This might be the service of a notice by the employer of its intention to stop contributing to the scheme or it could be a service of termination with immediate effect. Alternatively, it may be that the documents need to be amended to incorporate a wind up mechanism. In those circumstances, the trustees may need to consent to such changes. In turn, this may lead to a negotiation between the employer and the trustees. The trustees are likely to be reluctant to take action that does not appear to be in the best interests of their members as a whole.

At the outset it is essential that a proper communications planning exercise is carried out. This will need to address how the wind up affects each category of member.

The employer may wish to have a role in the communication of the wind up to its workforce and liaise with the trustees about the content and management of that process. It may be that the trustees and the employer will have a joint communication, which would also explain what will be the future service alternative pension provision being made available to current employees. (These days where a defined benefit scheme is wound up it is frequently replaced by a defined contribution or PRSA arrangement for future service.)

Depending upon the scheme, the employer may wish to set up a help line or arrange for a formal communication process with members.

It may be appropriate to have individual consultations with active members. If the workplace is unionised or special consultation procedures apply other consultation requirements may arise.

The employer needs to consider the employment issues that arise where the active members' pension promise is to be changed. This is a separate topic which usually requires a detailed consideration of the documents communicating the pension promise to the affected employees. It may also be appropriate to review the employment contracts of active members and draft changes to these to dovetail with the future service pension arrangements for active members.

When planning for the wind up it is appropriate to find out if all the members have been identified and that the scheme administrators have their up to date addresses. If there are doubts it may be necessary to advertise. This will require the inclusion of a notice in national newspapers.

Once the wind up has been triggered, the trustees will take control of the process. The trustees need to take professional advice to plan for and guide them through the winding up process. The Pensions Board and the Revenue Commissioners must be notified as soon as the wind up process has commenced.

The trustees should be mindful of their statutory responsibilities under the Pensions Acts 1990-2009 to ensure that the wind up is carried out without undue delay in accordance with the scheme's rules and the terms of the Pensions Acts.

One of the critical timing issues for trustees is deciding when to covert the scheme's assets into cash to secure the liabilities. Frequently this happens at the start of the wind up process, but, in each case, the trustees need to identify each asset which they are seeking to encash as there may be an advantage to hold a particular asset for a longer time. This point may be a reason why the wind up process might be delayed.

The trustees will also be concerned about their own personal liabilities and will have an eye on the terms (if any) of their exclusion and indemnity provisions under the trust deed and rules. If these are not adequately broad, the trustees may look for an overarching indemnity from the employer. This is likely to be of assistance to the trustees because it may be that there are scheme liabilities that were never properly notified to the trustees by the employer. The trustees may consider taking out insurance to cover any such claims. If the employer is responsible to pay the cost of such insurance it may prefer to indemnify the trustees rather than discharge the cost of such insurance.

Once the formal wind up process has occurred the trustees must notify all members within twelve weeks of the wind up. Usually what happens is that the trustees write to members, initially, to tell them the wind up is happening. The actuary will then value the liabilities as at the wind up date and establish the likely values available for each member. The trustees are likely to get a range of quotations from various life insurance companies to establish the cost of securing the pensioner liabilities and also other entitlements. The foregoing valuation and quotation process may take some months to conclude. The trustees will then write to individual members explaining the financial implications for each individual member of the wind up and ask each person how they want their benefits applied.

Depending on the solvency of the scheme, members may have their benefits fully secured through the purchase of annuities or deferred annuities from a life insurance company. In addition, active and deferred members may be offered a transfer value to a specific pensions product or one which they may nominate. If the scheme has a deficit, depending on the facts, pensioners may not have their benefits fully secured. Pension increases are not secured unless exceptional circumstances apply (e.g. the scheme provides for guaranteed increases) and the scheme is very well funded.

Where the scheme has a deficit, the Pensions Act sets out the order of priority in which assets must be applied. Broadly, scheme assets are first used to discharge liabilities relating to additional voluntary contributions paid by members (and related transfer payments), then pensioner liabilities (excluding future increases) are discharged, and after that, broadly speaking, everybody else has their entitlement dealt with. The level of abatement which may arise is always facts specific.

Where the scheme does not have a deficit, the order of priority set out in the trust deed and rules will apply.

Once the assets have been applied in discharge of the liabilities, and the expenses of the wind up have been paid, the process will have been concluded. At that stage, it may be appropriate to document the fact that the scheme has been wound up and the trustees are discharged of their responsibilities.

Sometimes, employers decide to top up the benefits secured in the wind up, particularly if the scheme has been wound up with a deficit. This may be done on a member by member basis or in conjunction with the trustees, depending upon the facts.

December 2010.

For further information please contact Fiona Thornton.