FAQ– Pensions operated by an insolvent as an employer


These FAQs are to assist official receivers in understanding the subject and should be read in conjunction with the more detailed guidance given in the main body of the Technical Manual chapter.  Links to the relevant parts of the Technical Manual are given within the FAQs.

What do you mean, a ‘pension operated by an insolvent’?

This is a pension operated by a company in liquidation or a bankrupt, as an employer, for the benefit of the employees.  You are far more likely to encounter such a pension in a company case.

Another set of FAQs covers questions relating to pension schemes of which a bankrupt is a member.


OK.  So what do I have to do?

The difficulty, when an insolvency order is made against an employer, is that it will no longer be able to operate the pension scheme and, particularly, it will be unable to continue to make contributions to the scheme. 

Although not directly the responsibility of the official receiver, the rules surrounding how such a pension are dealt with are designed to ensure that, so far as is possible, the benefits promised to members under the pension are paid.  There are certain tasks for the official receiver in this regard, which are covered later.


What do I need to know about occupational pension schemes?

For the purposes of fulfilling the official receiver’s obligations, you do not need to know too much about occupational pension schemes.  Suffice to say that there are two types of occupational pension schemes. 

The first is a ‘defined contribution’ scheme where the contributions to the pension scheme accumulate into a fund which is invested and then used to pay the pension benefits.  In this type of scheme, the benefits payable will relate directly to the value of the accumulated funds. 

The second type of scheme is called a ‘defined benefit’ scheme.  As a civil servant you will be familiar with this type of scheme as it is the type that you are a member of.  This is a scheme where the benefits are promised at the outset and generally relate to the time that the person has been a member and the amount of salary they have earned whilst a member or when they retire, rather than being connected to the monies paid into the scheme.

In both types of scheme, contributions are generally made by both employer and employee.

See paragraph 61.71.


What about stakeholder pensions?

Stakeholder pensions are effectively personal pension schemes accessed via the employer and managed by a financial services company.  In that sense they are not pension schemes operated by the insolvent employer and the official receiver need not be concerned with these schemes as they will continue to operate outside of the insolvency (see paragraph 61.9).


What role does the official receiver have in this?

The official receiver’s prime duty is to inform interested parties of the making of the insolvency order.


Who are these interested parties?

They are the Pension Protection Fund, the Pensions Regulator and the pension trustee(s) (see paragraph 61.85).


What do these organisations do?

The Pension Protection Fund has the duty to provide a minimum level of benefits to members of defined benefit schemes.  Where the assets of the scheme are insufficient to pay the benefits that the members were promised, the Pension Protection Fund can make up some of the shortfall.


And the Pensions Regulator?

The Pensions Regulator has the job of ensuring that persons responsible for providing access to and managing work based pension schemes fulfil their obligations.  They have the power to seek an order that a person responsible for a pension fund having insufficient assets to pay benefits (leaving the Pension Protection Fund to ‘pick up the tab’) makes a financial contribution to the assets of the scheme.  The Regulator can also appoint an independent trustee.


Trustee?  What does the trustee do?

The trustee’s role is to ensure that the pension scheme is managed according to the trust deed and rules.  A pension scheme may have a number of trustees and they may be a combination of members of the scheme, the employer, specialists or a financial services company.  At least one third of the trustees must be nominated by the members of the scheme.


How are these interested parties notified of the making of the order?

Notification is by way of the submission of a notice called a ‘section 120’ notice.  It is called this after the section of the Pensions Act 2004 that requires it be sent.  The form can be submitted in paper form, or on-line.

The Official Receiver, as liquidator or trustee, has also to issue a ‘section 122’ notice to advise the interested parties whether or not the insolvent business is to be rescued.  If the business is to be rescued, the pension scheme can continue.  Of course, it is extremely unlikely that any business being dealt with by the official receiver, as liquidator or trustee, will be rescued (see paragraph 61.89).


When should these notices be issued?

The section 120 notice should be issued within 14 days of the making of the insolvency order or the official receiver becoming aware of the existence of the pension scheme.

The section 122 must be issued as soon as practical after the decision has been taken whether or not the business is to be continued.  For most official receiver cases this is likely to be no later than the time that the report to creditors is issued (see paragraph 61.89).


What is the effect of the section 120 notice being issued?

The issuing of the section 120 notice starts a process whereby the Pension Protection Fund will decide whether the pension scheme will be taken into an assessment process, during which they will decide if the scheme has any shortfall that needs covering.  If so, they will assume control of the scheme from the trustees, but the assessment process takes around two years so is unlikely to be completed within the period that the official receiver is dealing with the insolvency. 

It is likely that any defined benefit scheme operated by the insolvent will be taken into the assessment process (see paragraph 61.101).


And what is the effect of the scheme being taken into the assessment process?

The Pension Protection Fund will assume creditor rights in respect of the pension scheme – for employer contributions to the scheme, for example (and should therefore be added to the list of creditors).  Otherwise the trustees will continue to manage the scheme, following the trust deed and rules.


What if the company in liquidation is the sole trustee?

The trustees have the duty to manage the pension scheme.  It is possible that the company was a trustee of the scheme, and might even have been the only trustee.  If the company is the sole trustee, the duties of the company as trustee would fall to the official receiver as liquidator to discharge, which can be administratively burdensome.  If there are other trustees, the discharge of the trustee functions can be left to the other trustees.

Fortunately, this situation is unlikely to occur as the Pensions Regulator will generally appoint an independent trustee if the insolvent company is the only trustee (see paragraph 61.96).


What if the Pensions Regulator does not appoint an independent trustee?

It is likely that the Regulator will be able to be encouraged to make such an appointment as there can be a conflict between the liquidator’s duty to manage the scheme to the benefit of the members and his/her duty to realise the company assets (which can include any scheme surplus) to the benefit of the creditors.  In the extremely unlikely event that they do not, the official receiver should seek the early winding-up of the pension scheme (see Annex G).


How is the winding-up of the pension scheme arranged?

It should be possible to effect the winding-up of the scheme simply by requesting this in writing to the financial services company with whom the scheme was arranged.  If not, the advice of Technical Section should be sought.

If the scheme is in the Pension Protection Fund assessment process the official receiver should seek their authorisation for the scheme to be wound-up before starting the process.  Of course, winding-up by the official receiver will not be necessary if the scheme has been taken into the control of the Pension Protection Fund (see Annex G).


Are there trustee duties that the official receiver may need to carry out before the scheme is wound-up?

There are some other duties that the official receiver may need to carry out.  These are explained in the Technical Manual but, generally, they may be categorised as duties to issue documentation to the scheme members.  For the most part, it should be possible for the financial services company through whom the pension scheme is operated to carry out these duties (see Annex G).


Are there any other actions for the official receiver to carry out?

The official receiver has a duty to co-operate with the trustees of the pension scheme, the Pensions Regulator and the Pension Protection Fund and to supply information, as requested, to enable those parties to carry out their various functions (see paragraphs 61.91 to 61.92).

The official receiver also has a duty to report, to the Pensions Regulator, any concerns he/she has regarding the operation of the pension scheme (see paragraph 61.94).

Finally, the official receiver may need to defer the dissolution of the company if the winding-up of the pension scheme has not been completed (see paragraph 61.95).