Are you wind-up ready?
19 Jul 2019
As we start to see pension schemes increasingly approach full buy-out funding, we surveyed 100 pension scheme trustees to assess their state of readiness to complete a wind-up. Of those surveyed, 63 said they feel confident and 30 said they are not concerned about the practical steps required to wind-up their scheme (when they can afford to do so). But is this confidence misplaced?
While a wind-up is conceptually simple, it is often the most complex and costly project that a scheme will ever undertake. So let’s look into some of the detail to test whether you are indeed wind-up ready.
Data cleansing – is your membership data buy-out ready?
Trustees often think their data is in good shape without appreciating that significantly more data cleansing will be needed before wind-up. This is the last opportunity for trustees to ensure that every member gets the correct benefits at the right time. Carrying out a data audit at least 5 years from wind-up is a good way to avoid unexpected delays and unplanned costs. There will inevitably be unknowns and it is best to flush these out early in the process.
Benefits– have your legal advisers reviewed a detailed benefit specification?
This benefit specification will replace the Scheme’s Rules after wind-up so it must be right. For long established schemes with legacy benefit structures, this can be an extremely complex task. You’ll also need to check that the benefits held on members’ records are consistent with the specification. This process can sometimes flush out issues, so again it is worth making an early start.
Assets – do you hold any illiquid assets?
If so, do you have a plan to exit these investments? Illiquid assets can be a valuable part of an overall investment strategy, however, at some point these assets will need to be cashed in - even if this is to sell the asset for a nominal sum. Even a £100 investment in an illiquid investment can hold up the wind-up of a scheme.
Member communications – do you have a strategy of how you’ll engage with members?
A wind-up can be a stressful time for members and particularly for pensioners who are relying on their monthly pension income. Unsettled members can quickly add time and cost to a wind-up. And any formal complaints can add months of delay to the process. Having a clear communications strategy and providing members with effective communications over the course of the scheme’s journey can help minimise this.
Closing the gap - are you targeting a shortfall or surplus on wind-up?
Understanding what you are targeting, who is entitled to any surplus and how/when it is paid out is very important. Accurate monitoring is equally important in order to know when wind-up is affordable.
Historic annuities – do you have any and do you hold the relevant documentation?
While these annuities are often small in the context of the overall scheme, they can be difficult to sort out; documentation is often missing or incomplete, especially if different annuity providers have been used over the years. Reviewing policies early in the process is crucial to a smooth wind-up.
Project plans – do you have a wind-up plan in place?
If you’re still several years from winding-up, this could be very high level but it is important to start mapping out your scheme’s journey, and ultimately this will be key in helping control risk, costs and timescales when you reach wind-up.
Still confident?
We hope so. But if not, with the right amount of planning a wind-up need not be a scary prospect. Broken down into bite sized chunks, and starting early enough, it should be possible to work your way through a wind-up without any sleepless nights. If you’d like to talk more about getting your scheme wind-up ready please get in touch.
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