You go from room to room, checking nothing has been forgotten and that everything looks in good (enough) condition, closing doors and switching off lights. Then you go to the estate agents, hand in the key, take a deep breath, cross your fingers and... ask for your deposit back.
Being the last trustee taking a scheme through its endgame (in most cases, buy-in, buy-out and wind-up) can feel a bit like that.
You almost certainly weren’t there for most of the scheme’s life. But you are the one in charge of the final clean-up operation. The one who has to check that all liabilities have been discharged before terminating the scheme.
But how do you decide what tidying up (or in legal terms “due diligence”) to do before you go?
Unfortunately, there is no one-size-fits-all pension scheme clean-up job. Nor will you have unlimited time or budget to spend on it. Plus, however much you do, at the end of the day, it’s never going to be perfect. Pensions schemes have simply been around too long and have seen too much for that to be a realistic prospect.
So what sorts of things might influence your approach?
How complex is your scheme?
Have there been lots of transfers in and/or benefit changes over the years? Are there lots of sections? How often has the administration changed? How and when have the rules been updated? Overall, how much scope is there for things to have gone wrong, and how confident are you in how well the scheme has been run?
What (or where) are the biggest risks?
Are your members and/or liabilities concentrated in a couple of sections? How long ago did most members leave service? What have been the big-ticket events in the scheme’s history? Where is it most likely that things could have gone wrong? What would have a big financial impact if there was a problem? Are there areas of the scheme which have been well explored (where any issues are likely to have already surfaced) and others which are largely untouched?
What information is available?
How good are the scheme records? Are there sections of the scheme or parts of the historical picture where you just don’t have much information or documentation? If you’ve made reasonable enquiries and still haven’t found much about certain areas of the scheme, you’ll be limited in terms of what checking you can do. Legal due diligence is often an exercise in the “art of the possible”.
What is your budget?
As pension schemes are complex, you need to know what it is you are looking for (and what to do if you find something). Getting the experts in makes sense but there is a cost. Cost can be a particularly important consideration for smaller schemes who may need the most help, but have the lowest budget for advice. However, even if your budget is limited, would it be worth getting some expert input into how to approach your due diligence to ensure you are using your resources in the most effective way?
What will you do if there are any claims post wind-up?
Due diligence is primarily about making sure beneficiaries receive the correct benefits. But it’s also about assessing and reducing the risk of post-wind-up claims. The checking you do might depend on what cover you will have if any claims did arise. Some larger schemes may be looking at getting bespoke residual risk cover from their insurer, but others will be relying on an indemnity from an employer whose financial position could change in future, and/or run-off insurance which is likely to be limited in terms of value, duration and scope.
What does the employer / insurer want or require?
Some trustees may need to take account of particular requirements or expectations from the employer and/or relevant insurers when planning their due diligence. If you are taking out residual risk cover, this will heavily dictate your approach. If you already have buy-in policies in place, you may be subject to “no digging” clauses in those policies that you will need to navigate. If you will be relying on an indemnity, the employer might have preferences about how to reduce its exposure post wind-up.
Being a trustee is always a big responsibility. Being the last trustee is a huge responsibility.
There are no more second chances. No more “let’s just cross that bridge if we come to it”. This is it. And it’s your signature on the deed of termination.
Are you ready to turn off the light?
Naomi Brown, Senior Counsel at Sackers
