Pension funding options

Occupational pension schemes are arrangements established by employers for the benefit of their employees.

Occupational pension schemes have traditionally been established and run under a trust. Scheme assets are held by the trustees of the trust for the benefit of the scheme members.

From 6th April 2006, all registered pension schemes must have a registered scheme administrator. This role is usually taken on by the scheme trustees unless otherwise stated.

Prior to A-Day, there was a requirement that the employer pay a minimum amount into an occupational pension scheme. Since 6th April 2006, that rule is no longer in place although in the vast majority of cases, the employer will make contributions.

Prior to A-Day, contracted in money purchase schemes (CIMPS) operated under HMRC occupational pension scheme rules with associated limits. Now as registered pension schemes CIMPS follow the same HMRC rules as those described in chapters 2 and 3.

CIMPS operate in a similar way to personal pension plans in that benefits are ultimately based on the level of contributions paid by the employer and where applicable the employee along with the resulting performance derived from the investment of those contributions.

The employer will establish the eligibility rules for employees to join the scheme together with how and when benefits will be provided.

Scheme establishment

CIMPS are generally established under trust with associated trustees and rules. As mentioned above there must also be a registered pension scheme administrator.

Trustees have the following roles:

Oversee the running of the scheme for the benefit of its members

Operate the provisions of the trust according to trust law and pensions legislation.

Trustees must be appointed when a scheme starts. If a scheme reaches a certain size there must also be one or more trustees nominated by scheme members (member nominated trustees).

Trustees responsibilities include:

Ensuring that the scheme produces audited accounts or payment schedule

Ensuring that the appropriate advisers are appointed, such as legal advisers, auditors, etc

Production of schedules of payment to show contributions that been paid into the scheme

Production of a statement of investment principles (SIP) for the scheme to use in respect of the investment decisions that will be made. Trustee must ensure that the SIP is prepared and maintained. It must also be updated on occasions deemed necessary.

Occupational pension schemes are governed by the Pensions Act 1995 which was established with the primary objective of protecting the benefits of pension scheme members. The trustees of the pension scheme must stand between the members of the scheme and the employer. The Pensions Act 1995 has been amended in certain areas by the Pensions Act 2004. As a result of the Pensions Act 1995 there are a number of additional requirements for occupational pension schemes:

A written Internal Disputes Resolution Procedure to deal with disputes between members and trustees

Trustees must retain full records for 6 years

Members must receive certain information within specific timescales such as scheme information, annual statements and notification of benefits

A payment schedule needs to be produced showing all contributions have been paid into the scheme as required

A minimum of one third to the trustees must be member nominated, subject to a minimum of one member nominated trus...

Shortened demo course. See details at foot of page.

Death benefits

Death in service benefits

Under the trust established with a CIMPS, benefits on death in service should be paid free of all taxes to the nominated beneficiaries. There is no limit to the death benefit payable but if made as a lump sum, any excess above the lifetime allowance will be subject to a tax charge of 55%.

Part or all of the fund can be used to provide a dependant’s pension. Where used in such a way, there will be no lifetime allowance tax charge regardless of the amount allocated towards providing dependants’ pensions.

Death after retirement benefits

Where a lifetime annuity is purchased on taking benefits from a CIMPS the member is entitled to choose the amount of spouse’s/civil partner’s pension to be included if any. The maximum guarantee period is 10 years and can only be paid as a pension (not as a lump sum).

If the pension drawdown option (where available) is taken, the member’s spouse/civil partner will have a number of options on death including a purchase of a lifetime annuity in their own name, continuation of pension drawdown or repayment of the remaining fund less tax at 55%.

Closure and wind up

An employer may decide that a CIMPS should be closed or wound up.

Closure would mean that either no new members will be allowed to join the scheme, or all contributions to the scheme stop. In either case there will be existing members who retain benefits of some sort in the scheme.

Winding up of the scheme effectively means that it will cease altogether and the assets belonging to members will be moved elsewhere. The employer in this situation could purchase section 32 buy out plans for each member (normally the default option should members not transfer to another scheme) or could establish a new scheme to which members could decide to transfer.

Employees must be notified of the intention to wind up the scheme. They must be given the option to transfer benefits to their own personal plan if so desired.

Targeted money purchase schemes

Targeted money purchase schemes are money purchase schemes that intend to fund the scheme in order to reach a targeted level of benefits.

The contributions rate for each member is reviewed on an ongoing basis to enable the scheme to be funded towards providing the intended level of benefits.

At retirement, the value of the member’s defined contribution assets may be added to in order to make sure that the intended benefit levels are provided. The top up may come from either:

An unallocated account held within the scheme specifically for this purpose; or

Additional one off contributions from the employer.

However, a targeted money purchase scheme cannot be described as offering the same level of certainty that a defined benefit scheme can, as the only promise is the value of the defined contribution assets for individuals when they retire. Indeed, the employer can disconnect themselves from the funding target at any time.

These days targeted money purchase schemes are rare. In practice an employer is likely to use a cash balance arrangement to provide some element of guarantee for fund returns/value without providing the notional defined benefit promise.

With a COMPS, the member and the employer pay reduced national insurance contributions.

The employer ensures that a flat rate rebate is paid into the COMPS reflecting the reduction in both employer and employee national insurance...

Shortened demo course. See details at foot of page.

A member of a COMPS may receive an S2P top up paid by the State as rebates paid into a COMPS don’t include the S2P enhancement to those on low earnings.

Shortened demo course. See details at foot of page.

Establishing an EPP/SSAS

EPPs and SSASs are defined contribution pension schemes mainly aimed at senior employees and company directors. EPPs tend to be single member schemes whilst SSASs are defined as self-administered schemes with less than twelve members all of whom must be trustees. Rules for both these schemes now fall under the same tax rules for all registered pension schemes.

An EPP is usually established either under trust with accompanying trust deed and rules or by a deed of adherence which allows the employer to join the pension provider’s master trust.

A SSAS is usually established under trust evidenced by a trust deed and rules.

Funding

Employers no longer have to contribute to occupational pension schemes although both these arrangements are established in the majority of cases with the employer contributing to provide an additional benefit to the employee. The...

Shortened demo course. See details at foot of page.

Commercial property purchase and SSAS borrowing

A SSAS can purchase a commercial property from a third party or the sponsoring employer. It can also purchase commercial property from a connected party such as a scheme member.

However, any borrowing taken from connected parties (such as members) must be on normal commercial terms – or may result in tax bills. The property will be a scheme asset and investment returns will be in the form of rental income and capital growth from appreciation in the property value.

The company will be a tenant and have to pay a commercial rent to the scheme.

If the SSAS needs to borrow to buy the property, the maximum it can borrow is 50% of the value of the fund. There is no statutory requirement for borrowing to be secured although most lenders will insist on borrowing being secured against the pension scheme assets.