PENSION funds are one of the most tax efficient savings vehicles out there but there are times where due to one reason or another, they need to be shut down in order to secure the member benefits. This is not entirely a preserve of pension funds alone. Many financial institutions have been placed under administration and barred from accepting new premiums or deposits.
Trustees are given a special mandate to see to it that the pension fund is run in the best interests of the beneficiaries. I have however seen that few trustees are aware of their power to close a pension fund in order to secure member benefits. Most of the pension fund problems we see today have been compounded because trustees are usually reluctant to close the fund when trouble strikes with no solution in sight. Examples of such problems include; sever under funding of pension schemes and people reaching retirement only to see that there is no money for them in their fund because the employer hasn’t been contributing for years.
Conflicts of interest also come into play when a pension fund needs to be closed. This is because while a pension fund can fail to have enough money to pay its pensioners, it will nearly always have enough money to pay its service providers. This means that there is a real danger that the trustees’ advisers fail to advise them to close the fund to curtail an unsolvable problem because if they do so, the advisers would have lost a client. Only professional consultants have the integrity to advise a pension fund to close down because consultants make money as long as the pension fund remains in operation. It is interesting to note that even the regulator in our pension system seems to have cold feet when it comes to issuing directives to close or freeze the operations of troubled pension funds.
The different types of pension fund closure
Closing a pension fund can mean several things. At the most basic level, it can mean that no new entrants are admitted into the pension fund. Existing members are allowed to earn benefits and continue paying in contributions as usual. Such a situation normally happens when a company is the subject of an acquisition or a takeover and the trustees deem it in the best interests of the existing pension beneficiaries to remain in their current pension fund. Zimbabwean trustees however are not cognisant of their powers in merger and takeover negotiations where they are required to ensure that their members’ pension benefits are protected.
Closure of a pension fund can also refer to a situation where the members of the pension fund stop earning future benefits. For every single day that a pension fund is in operation, its active members earn benefits – these are called liabilities of the pension fund (because the pension fund is liable to pay these benefits at some time in the future). While on one hand, the liabilities are constantly growing, contributions, as a percentage of salaries must be put into the pension fund after every month. As you are aware, few employers are managing to pay contributions into their pension funds. This is resulting in a disparity between the values of assets and liabilities and can be seen in the huge deficits that are being posted by major pension funds. As a trustee, there are things that you can do to ensure the protection of your members’ benefits even if your employer is not paying contributions into the fund (I covered some them in this article here).
It is important to note however that there comes a time where the employer’s debt to the pension fund becomes so unsustainable that it becomes a threat to the viability of the pension fund. At such a time, it is the duty of the trustees to curb the growth of liabilities by closing the pension fund to future accrual of benefits. This move serves to protect the benefits that members would have already earned to date. Such a move should be communicated to all the members so that they can form reasonable expectations of the money they can expect to obtain from the fund.
The final type of pension fund closure involves extinguishing the liability from the books of the pension fund. This normally happens when the employer is bankrupt and the business liquidated. If the trustees were smart enough to collateralise the employer’s debt to the pension fund, odds are the pension fund will be awarded proceeds of the liquidation. Depending on the ages of the beneficiaries, some will have the option to receive their money as cash, others will have their monies transferred to life assurance companies or even other pension funds in the event that they would have found alternative employment.
The ability to close a pension fund is just one of the many powers that are given to trustees by common Trust Law and pensions legislation. I would advise trustees of troubled pension funds to consider this option as a means of stopping the adverse development of a situation that they think is unsolvable. Failure to do so can lead to more losses in the long-run.
Thomas Sithole is an Actuarial Analyst (Enterprise Risk Management) at Bluecroft Actuarial Solutions. Please refer to his corporate profile on this web address to contact him: thomas.bluecroftsolutions.com
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