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The Actuary The magazine of the Institute & Faculty of Actuaries

Pensions: The Financial Assistance Scheme

The Financial Assistance Scheme (FAS) was established by the Government to help people who have lost pension benefits as a result of being members of an under-funded defined benefit scheme. To qualify, a scheme must have commenced winding up between 1 January 1997 and 5 April 2005 and must meet one of the following conditions:

>> The sponsoring employer has been unable to make up the shortfall because it is insolvent or no longer exists

>> A compromise agreement is in place between the sponsoring employer and the scheme, where enforcing the full debt due against the employer would have forced the employer into insolvency; or

>> On wind-up, the employer was still solvent and any debt the employer was obliged to pay to the scheme had been paid (or a sufficient proportion had been paid), but at a level that was not enough to secure members’ benefits in full.

The FAS is managed by the Department for Work and Pensions (DWP) and is administered by the FAS Operational Unit (FAS OU). It makes payments to top up scheme benefits to eligible members of schemes that are winding-up or have wound-up.

As part of a continuing process of improvement, the FAS has recently issued a Trustee update. This sets out guidance covering new stewardship arrangements which are designed to assist Trustees to take a proactive, project management approach to the progression of their scheme through wind up until such time as its assets and data are transferred to the FAS. This new update follows quickly on the heels of the update issued by the FAS in July where the issues noted fell under three headings:

>> The efficient progress of schemes through wind up

>> The preservation of scheme assets

>> The quality of scheme data.

It has been estimated that qualifying scheme assets could be as high as £1.7bn and naturally the Treasury is keen to collect these funds (and assume responsibility for associated payments) as soon as possible. The FAS has confirmed that it expects all remaining assets and data from the majority of qualifying schemes will be transferred to it by 30 June 2010.

To assist in this process, the FAS is focussing on the importance of implementing a project plan to ensure that schemes complete all the necessary tasks to wind up as efficiently as possible with the aim of meeting the two year target as set out in the recent guidance from the Pensions Regulator (TPR). The FAS has been working with the Pensions Protection Fund (PPF) to identify the systems they will need to support trustees to wind up their schemes as efficiently as possible.

Representatives of the FAS and the PPF are carrying out road shows around the country, visiting trustees and scheme administrators, to discuss the purpose and implementation of the new stewardship arrangements. They are also taking the opportunity to ask for feedback on their proposals.

All qualifying schemes are being asked to complete an initial stewardship report which will give the FAS general information about the scheme. The stewardship report will also provide an overview of progress towards wind up and the transfer of assets and liabilities to the FAS. This will include a project plan for ongoing management of the wind up, an indication of any potential delays to the wind up process, a budget for the wind up costs and information about the amount of assets that the trustees expect to be able to eventually transfer to the FAS.

Thereafter, we have been told that the FAS will be assigning caseworkers to each scheme, mirroring the PPF’s approach to working with trustees through the assessment stage. Trustees will be required to update the project plan on a regular basis (details of how often are still to be published) and discuss progress with the caseworker.

Although further legislation and operational processes are still to be developed to allow the FAS to take in the schemes’ assets, trustees will be expected to meet the requirements set by it to allow the transfer of scheme assets and data. Until this time, trustees will still continue to have a fiduciary duty to act in their members’ best interests. However, interestingly, the FAS update on new stewardship arrangements says that they "would expect trustees to take taxpayers’ interests into account when making decisions in their schemes". In fact, the Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2008, which came into force on 17 July 2008, provide the FAS with powers to direct trustees to undertake particular actions in order to protect the remaining assets within qualifying schemes.

Unlike the PPF, which is funded by a levy from all PPF-eligible defined benefit schemes, the cost of the FAS is met by the taxpayer. The final report from Andrew Young of the Government Actuary’s Department (GAD) recommended that to provide a guaranteed level of assistance, the Government should pool all the residual assets of qualifying schemes and make the payments as they fall due. Thus, it would appear that the Government will be operating the FAS as a pay as you go scheme. Residual assets being taken in by the FAS may not actually be invested, but this is subject to further clarification by FAS. However, the Government recognises that while trustees continue to hold the assets prior to them being passed over to the FAS, there is a potential investment risk to the taxpayer as the trustees’ decisions on investment strategy could impact negatively on the value of funds held. Thus, the FAS will be monitoring trustees’ investment strategies to ensure that undue risk is not taken.

Not all the assets of a qualifying pension scheme will be transferred over to the FAS. Under the Financial Assistance Scheme (Halting Annuitisation) Regulations 2007, trustees can no longer purchase annuities unless they entered into a binding commitment to purchase the annuities on or before 26 September 2007 or the trustees have applied to the FAS and obtained permission to purchase annuities. However, at the current time, trustees still have the option to offer members a wind up lump sum or transfer value from the scheme during the wind up process.

If members choose either of these options, then the FAS will not receive the corresponding assets from the scheme in respect of these members, but will still pay assistance to these members at Normal Retirement Age. The assistance payments will be the difference between 90% of the members’ expected pension (subject to a current maximum of £26,000) and the annuity value of the lump sum or transfer value taken at the earlier date. Given that the FAS has the power to direct trustees to undertake particular actions in order to protect the remaining assets within qualifying schemes, it is possible that the member options of a wind up lump sum or transfer value may be removed.

Trustees will need to ensure that they have calculated budgets for scheme expenses, covering all key tasks to be completed during the wind up process. This means that a concerted effort will need to be made by the trustees, and their advisers, in the areas of administration and management of scheme assets during this period. At the same time, the FAS will expect trustees to complete the wind up as efficiently as possible without excessive cost. The FAS is likely to ask trustees for supporting documentation to verify important milestones within the scheme wind up. It is likely that the reporting arrangements will be similar to those currently in place for those schemes in the assessment period for entering the PPF.

Greater emphasis will also be placed on the quality of scheme data. The FAS will require trustees to ensure that their scheme data is audited, with all contracted out benefits being reconciled prior to the scheme assets and data being passed to it. Trustees will also have to carry out existence checks and tracing exercises in respect of all scheme members. All of this has to be done in a timely manner. The FAS has said that it will not be willing to accept excuses for these tasks not being carried out in line with times detailed in project plans.

There is no doubt that up until the point at which the FAS accepts scheme assets and data, the new stewardship and ongoing reporting requirements will be more onerous for both trustees and administrators. However, the upside is that it will focus all minds on the necessary steps to complete the wind up of the pension scheme in a timely manner, and ultimately this will benefit scheme members.

Claire McGruer is a Trustee Representative at Dalriada Trustees Limited