Experiences of occupational pension scheme wind-up
A hard copy of this report summary can be obtained by contacting Paul Noakes [E-Mail: Paul.Noakes@dwp.gsi.gov.uk] or by writing to him at the 'Social Research Division, Department for Work and Pensions, 4th Floor, Adelphi, 1-11 John Adam Street, London WC2N 6HT'.
Research Report No. 75
By Karen Bunt, David Howells and Mark Winterbotham
This report examines members' experiences of occupational pension scheme wind-up. Depth interviews were carried out in Autumn 1996 with about 100 members and 20 trustees or administrators from 20 private sector occupational pension schemes. The study, by IFF Research Ltd, was commissioned by the Department of Social Security (DSS). It was conducted prior to the implementation in April 1997 of strengthened disclosure regulations which specified the type and timing of information trustees must provide to members during scheme wind-up, and new measures introduced by the Pensions Act 1995 including greater flexibility in the way trustees discharge the scheme's liabilities. The research was designed to provide baseline information to evaluate these changes. The main findings are:
- Most members knew about the change in their scheme's status and the reason for this. Those in receipt of a pension, or approaching retirement or with several years rights in the scheme tended to be more aware of what had happened to their pension rights than deferred pensioners, or younger members, or those who had not been in the scheme for very long.
- Members were evenly divided between those who felt the process of wind-up had been handled in a satisfactory manner and those who did not. Members who were kept well informed had a better understanding about what was happening to their scheme and their pension rights and were more satisfied. Those who were less satisfied felt they had received insufficient information and the information they had received was difficult to understand. They also felt the process took too long.
- Members' suggestions for improving the process included: being informed more quickly after the decision to wind the scheme up had been taken; providing information more regularly about what is happening to the scheme at key stages and why; trustees or administrators to state clearly and explain the options available to them, the benefits and drawbacks of each, and where appropriate to give a recommendation; having concise, well presented information avoiding the use of jargon and technical terminology; and having clearly set out and effectively explained figures or calculations.
- Trustees' and administrators' suggestions for improving the process included speeding up dealings with the DSS, communicating with members earlier in the process, the earlier appointment of an independent trustee where a salary related scheme had gone into liquidation, and improving the maintenance of scheme records.
Introduction
This research examined the experiences of occupational pension scheme members whose scheme had been frozen, wound up or was in the process of winding up. Depth interviews were carried out in Autumn 1996 with about 100 members and 20 trustees or administrators from 20 private sector occupational pension schemes. The study, by IFF Research Ltd, was commissioned by the Department of Social Security (DSS). It was conducted prior to the implementation in April 1997 of strengthened disclosure regulations which specified the type and timing of information trustees must provide to members during scheme wind-up, and new measures introduced by the Pensions Act 1995 including greater flexibility in the way trustees discharge the scheme's liabilities. The research was designed to provide baseline information to evaluate these changes. The research examined members' knowledge and understanding of what had happened to their scheme and to their pension rights. It sought views on the information received, on the way the process was handled and on suggestions for improvements. Trustees and administrators were interviewed to obtain factual details about the scheme wind-up, details about information sent to scheme members, views on the process and suggestions for improvements.
Members' knowledge and understanding about what had happened to their scheme
Most members had some understanding about what had happened to their scheme and knew that the scheme was no longer operating in the way it had been. They also knew that, as a result of their scheme being frozen or wound up, contributions were no longer being made into the scheme. Many of the members whose schemes had wound up or were winding up knew that their scheme had or would cease to exist. However, a few members thought that the scheme would continue to exist until everybody in the scheme had retired.
Most members were aware of the reason why the status of their scheme had changed. The reasons most often mentioned included: the company going into liquidation; the company being taken over; or the employer deciding that the scheme was too expensive to run.A minority of members did not know what had happened to their scheme or did not understand the reasons why their scheme had changed status. These members were from schemes where the pension rights were being transferred to another arrangement, for example, from a salary related to a money purchase scheme. These members tended to be deferred members or active members who had been made redundant at the time of, or just prior to, the change in the status of their scheme. They were also fairly young (typically under 35 years old) and had only been in the scheme for a short period of time.
Awareness of what had happened to their pension rights
Members were fairly evenly divided between those who had some understanding of what had happened to their pension rights and those who did not.
Members who were aware of what had happened to their pension rights
Members who were aware of what had happened to their pension rights were from schemes which were wound up or where the process of winding up was nearly complete; in particular they were from salary related schemes where the scheme was being wound up because the company was going into liquidation. In these cases, an independent trustee had been appointed to handle the winding up process. The majority of members were: active members, who were older (typically over 35 years old); or they had been in the scheme for a longer period of time (10 years or more); or they were pensioners.
Members who were not aware of what had happened to their pension rights
Members who were not aware of what had happened to their pension rights tended to be from schemes which were frozen, or schemes where the winding up process was not well advanced. These schemes also tended to meet one or more of the following criteria: insured schemes; schemes where members' entitlements were being transferred to another type of arrangement; or schemes which had only been operating for a short period of time (typically only two to three years). The majority of members tended to be: deferred members; or younger people (typically under 35 years old); or members who had not been in their scheme for very long (less than three years).
Information provided to members about the process of freezing or winding up the pension scheme
Most members received their information through letters, circulars and statements. A few members were informed in meetings; these tended to be members of small schemes (schemes with less than 20 members), where the company was still in business. The amount and regularity of the information received varied widely. At one end of the spectrum, members were kept regularly informed of how the process was progressing, problems encountered, what was happening to the funds and the value of their entitlement. These members were typically from salary related schemes which were wound up or which were winding up because the company had gone out of business. These schemes were more likely to have an independent trustee involved in the process of winding up the scheme. A number of these schemes were self-administered rather than insured. At the other end of the spectrum were schemes where members had received little information, typically a letter or a meeting at the time the scheme status was changed and possibly a few annual statements since then. These members tended to be from insured, money purchase schemes, which were frozen or schemes which were winding up, either because of the cost or difficulty of maintaining the scheme or because the company had gone out of business.
Members' views on the quality of information received
Members were evenly divided between those who thought the information they received was good and those who thought it was poor. Members who had invested in the scheme for some time or were closer to retirement were more concerned about the quality of the information they received. Members who thought the information they had received was good, felt it was clear, easy to follow and provided sufficient explanation about the process and how figures were calculated.
Members who thought the information they received was poor, felt they had not received enough information about what was going on and the information they had received was not easy to understand. They complained that letters were often too long and poorly laid out. They also contained too much jargon, and figures and calculations were hard to follow and not explained clearly enough.
Queries made by members during the process of freezing or winding up the pension scheme
Only a minority of members had raised queries with the trustees or administrators. Most of the queries were requests for more information, to clarify the information already received or to obtain more specific details about what would happen to their entitlements.
The majority of members who made enquiries were satisfied with the response they received, which they felt helped to clarify the situation. Reasons given by the minority of members who were not satisfied with the way their enquiry was handled included: the length of the delay between making their enquiry and receiving a response; a complete lack of a response to their enquiries; receiving an incomplete reply or not being able to understand the response they had received.
However, most members had not contacted the trustees with queries or requests for further information. There were a variety of reasons for this, including that: they did not know who to contact; they were too busy; they did not feel it was important as they were young or had only been in the scheme for a short period of time; or they just hoped things would be all right, feeling that they could do little to affect the process.
Views on the process of freezing or winding up the pension scheme
Members were fairly evenly split between those who felt the process had been handled in a satisfactory manner and those who did not.
The better informed members were kept during the process and the more they understood about what was happening to the scheme and their pension rights, the more satisfied they were with the process. Being kept well informed made them feel more confident about the effectiveness with which the trustees were handling the process. These members, who were more satisfied with the way the process was handled, were more likely to be in medium (between 20 and 99 members) or large (100 or more members) schemes and were either in schemes where an independent trustee had been appointed to wind the scheme up or in schemes where the members were being transferred to the parent company scheme.
Members who were less satisfied with the process complained that they had not received enough information about what was happening which led to concerns (often unnecessarily) that things might not be well with the scheme. They also criticised the length of time the process took and the quality of any information they had received.Members' suggestions for improving the process
Members' suggestions for improving the process
Members made a number of suggestions for improving the process. These included:
- Providing information more regularly;
- Informing members more quickly after the decision has been made to freeze or wind up the scheme;
- Ensuring all communication is concise, well presented with the key points highlighted;
- Avoiding the use of jargon, technical terminology and abbreviations;
- Providing information on what has or will be happening to the scheme at key stages and the reasons for this;
- Trustees or administrators should clearly state and explain the options available to members, the benefits and drawbacks of each and where appropriate give a recommendation;
- Figures and calculations should be well displayed and explained effectively;
- Information should be as specific as possible, for example giving a broad indication as early as possible of the financial position of the scheme, highlighting where and in what ways the process or implications will be different for different groups of members.
Trustees' views of how the process was handled
Recognising that “'Wind-ups are a very complex and lengthy process' ”most trustees or administrators felt that overall the process had gone well. A small number of trustees did experience some serious problems. These were due to: the merging of schemes with different pension arrangements; the trustees not handling the process as effectively as they could have done and the scheme not being run effectively prior to wind-up. However, all the trustees and administrators felt the process was too slow. The main reasons given by trustees for why the process took so long included:
- Lack of knowledge of the scheme - in particular where independent trustees or advisors were appointed to undertake the work;
- Poorly maintained scheme records - this reason was given by independent trustees or administrators and advisors who were not directly involved with the scheme prior to the change in status;
- The time taken to reconcile records with DSS, if the scheme was contracted out;
- Delays arising from legal issues, such as equalisation of pensions;
- Lack of cooperation and information from other parties, for example liquidators and former scheme administrators;
- Difficulties and delays in obtaining information from insurance companies;
- The division of responsibility between the different parties involved, for example the employer, trustee and administrator, were unclear.
Trustees also recognised members' frustrations about not being able to get specific information about their entitlements until late in the process. However, it was usually not possible to give this kind of information during the early stages. Trustees were often wary of providing provisional estimates of entitlement as they felt members would not understand that these were provisional and would get upset if they received a different amount, particularly if the amount was lower than the estimate. The increase in litigation and rulings from the Pensions Ombudsman on this issue had also made the trustees more cautious about any early declarations.
Trustees' suggestions for improving the process
Trustees suggested improvements in four main areas:
- Improving the maintenance of pesnion records
- Speeding up dealings with DSS;
- Improving dealings with other parties, for example liquidators or receivers, former administrators and insurance companies;
- Getting in touch and communicating with members earlier in the process. In the case of salary related schemes being wound up because the company has become insolvent, this would involve the earlier appointment of an independent trustee.
Relevant publications
Other publications on pension schemes:
B Casey, J Hales, N Millward (1996) “Employers' Pension Provision 1994 ”(DSS Research Report No. 58). London: TSO
D Dundon-Smith, J Hales, M Chetwynd, A Thomas, J Keegan (1997) “Pension Scheme Inquiries and Disputes” (DSS Research Report No. 66). London: TSO