Pensions Act 2004

Commentary on Sections

Part 5 – Occupational and Personal Pension Schemes: Miscellaneous Provisions

Winding up

Section 270: Winding up

1048.This section amends the provisions in the Pensions Act 1995, which give the order in which all occupational pension schemes’ liabilities are discharged when they are wound up. Broadly speaking, the amendments are intended to ensure that the benefits provided for members on the winding up of a scheme should not be less than the compensation that would have been provided by the Board of the Pension Protection Fund had the Board assumed responsibility for the scheme under Part 2 of the Pensions Act 2004.

1049.Subsection (1) substitutes new sections 73, 73A and 73B for the existing section 73 of the Pensions Act 1995 (preferential liabilities on winding up).

1050.New section 73(1) and (2) provides that section 73 applies to an occupational pension scheme which is being wound up, other than a scheme which is a money purchase scheme, a prescribed scheme or a scheme of a prescribed description. It is intended that the schemes to which section 73 applies will be broadly similar to the schemes which are “eligible schemes” within the meaning given by section 126 of the Act.

1051.New section 73(3) provides that a scheme’s assets must be applied first to satisfy the liabilities in respect of pensions and other benefits set out in new subsection (4). If the scheme’s assets are insufficient to meet all these liabilities then the assets must be applied to satisfy the liabilities in the earlier paragraphs of subsection (4) first. If there are insufficient assets to satisfy the liabilities in a particular paragraph in full then those liabilities have to be satisfied proportionately.

1052.New section 73(4) provides for the following priority order for scheme liabilities in respect of pensions and other benefits:

1053.New section 73(5) defines what is meant by: “corresponding Pension Protection Fund liability” and “relevant pre-1997 contract of insurance”. The “corresponding Pension Protection Fund liability” in relation to any liability for a pension or other benefit is the cost of securing benefits corresponding to the compensation under Part 2 of the Pensions Act 2004 that a person would have received in respect of the pension or other benefit had the Board of the Pension Protection Fund assumed responsibility for the scheme. Subsection 73(6) provides that in determining corresponding Pension Protection Fund liabilities regulations may be made that modify the provisions of Part 2 of the Pensions Act 2004 which govern the payment compensation under that Part.

1054.New section 73(7) provides that regulations may modify the priority order in subsection (4). New section 73(8) provides that regulations may prescribe how it is to be determined which paragraph of subsection (4) a liability derived from voluntary contributions falls within. Section 73(9) provides a power to make regulations modifying Chapter 5 of Part 4 of the Pension Schemes Act 1993 where that Chapter applied to a person on the commencement of the winding up period.

1055.New section 73(10) defines the meaning of “assets”, “liabilities”, “the pension compensation provisions”, “scheme rules” and “winding up period”.

1056.New section 73A(1) states that section 73A applies where a scheme to which section 73 applies is being wound up. Section 73A(2) provides that the trustees or managers must secure that, during a winding up period, any pensions or benefits paid to or in respect of a scheme member are reduced, so far as necessary, to reflect the liabilities that will be satisfied under the priority order in section 73(4). It also provides that trustees or managers may take such steps as necessary to recover any overpayment or pay any shortfall arising from the requirement to reduce pensions and benefits.

1057.Section 73A(3) provides that during a winding up period no benefits accrue under the scheme rules and no new members are to be admitted to the scheme.

1058.Sections 73A(4) to 73A(6) qualify the prohibition in section 73(3) and ensure that it does not prevent the accrual of increases in pensions and other benefits; any accrual derived from the investment of payments made in respect of money purchase benefits; or the discharge of a person’s pension credit rights derived from the scheme by the grant of rights under the scheme.

1059.Section 73A(7) and (8) provide powers to make regulations requiring the trustees or managers of a scheme to adjust the entitlements of a person to a discretionary award (such as an enhanced ill-health pension) or to a survivors benefit in certain circumstances. This will allow provisions to be made which prevent a discretionary award during the winding up period increasing the cost to the scheme of discharging the liabilities in respect of a member. The regulations may provide how the required adjustments are to be determined and the manner in which they are to be made and make provision about the consequences of breaching those regulations.

1060.Section 73A(9) states that if any person other than the trustees or managers of a scheme, (such as the employer in relation to the scheme) has powers under a scheme to distribute the assets of a scheme during a winding up, then those powers cannot be exercised by that person but, subject to sections 73, 73A and 73B Pensions Act 1995, may instead be exercised by the trustees or managers. Subsection 73A(10) defines the meaning of “appropriate rights”, “discretionary award”, and “shareable rights” and provides that subsection 73(10) also applies to section 73A.

1061.Section 73B(1) provides that actions taken in contravention of section 73A(3) are void. Subsection (2) provides that the Regulator may issue trustees or managers with a civil penalty if they do not take all reasonable steps to comply with the winding up provisions. Subsections (4) and (5) provide powers to make regulations about the determination, calculation and verification of scheme assets and liabilities and to modify the winding up provisions in certain cases (for example, in relation to multi employer schemes). Subsection (6) sets out that the winding up provisions do not apply to certain liabilities.

1062.Subsection (7) provides that the winding up provisions apply to liabilities under Chapter 4 of Part 4 of the Pension Schemes Act 1993 that arise before the commencement of the winding up period and were not discharged before that time. Subsection (8) confers powers to make regulations which provide that in prescribed circumstances entitlement to benefits arising from the death of a scheme member can be treated as having arisen immediately before the commencement of the winding up period. This is to provide for situations where a person does not satisfy the conditions for entitlement to a death benefit immediately on the member’s death.

1063.Subsection (9) provides that, if immediately before a winding up period a person is entitled to an amount of pension or benefit but has postponed payment, the person is not to be regarded as having become entitled to that amount before the beginning of the winding up period and so the winding up provisions will apply to that liability. Section 73B(10) states that, for the purpose of section 73B, “winding up provisions” means sections 73, 73A and 74.

1064.Subsection (2) of section 270 amends section 74 of the Pensions Act 1995 (discharge of liabilities by insurance etc) The amendments to section 74 introduced under this subsection bring it in line with the new section 73. Subsection (2)(a) amends section 74(1), so that it applies to a scheme which is winding up and to which section 73 applies. Subsection (2)(b) removes the words "(including increases in pensions)" from 74(2). Increases are referred to separately in the current section 73. However, the new section 73 no longer refers to increases separately and therefore the words in 74(2) are no longer necessary. Subsection (2)(c) adds a new sub-paragraph to section 74(3) of the Pensions Act 1995 and provides that the discharge of a liability for a pension or other benefit by payment of a cash sum in circumstances where prescribed requirements are met will be a discharge meeting the requirements of section 74(2). Subsection (2)(d) changes the reference in section 74(4) from "rules of the scheme" to "scheme rules". It also removes the words "(including increases in pensions)" from 74(4) as they are no longer necessary. Subsection (2)(e) removes subsection (5)(b) from section 74(2). Subsection (5)(b) is no longer necessary because new section 73B(2)(b) contains a power which will allow the modification of section 74 in relation to prescribed descriptions of schemes. Subsection (2)(f) inserts new subsection (6) which provides that money purchase assets and liabilities are excluded from the application of section 74. It also defines "scheme rules" by reference to the definition in the section 318.