Sales of large companies and the impact on their defined benefit (DB) pension schemes have recently made headlines and indeed any company sale where a final salary scheme is involved will require in-depth scrutiny.
For sales of smaller companies though, the pension implications of a change of ownership or winding up of a company are not always given the attention they need.
When an entrepreneur is selling or winding up their business, their pensions schemes may take a backseat or be overlooked. Not taking the appropriate action at the right time can lead to, at the very least, administrative problems and potentially costly legal bills.
Consider an entrepreneur selling or winding up their company where director/senior employee pension provision has been through a small self-administered scheme (SSAS).
SSASs are trusts and they are governed and operated in accordance with their trust deed and rules.
While a large portion of the rules will be standard and relate to legislation covering accrual and payments of retirement and death benefits, a wide variation of options exist with regards to whom the powers to operate the scheme are vested and how the scheme should be treated in the circumstance of the wind up or sale of the company.
Dealing firstly with a sale or wind up of a company, some SSAS deeds (more commonly the older ones) will specify that in either of these situations, the scheme should be wound up, with benefits transferred to alternative individual arrangements.
This will very rarely be desirable because SSASs often hold a wide range of assets and although SIPPs can hold most of them, the wind-up and transfer of assets to SIPPs will be an unnecessary expense. However, it is possible to continue to run a SSAS without a sponsoring company provided the scheme rules allow for this.
It should also be borne in mind that from 6 April this year, HM Revenue & Customs (HMRC) will have new powers to de-register an occupational pension scheme such as a SSAS, where the sponsoring company has become dormant.
This is an additional tool to help HMRC try to prevent pension scams but they have stated that it is their intention only to de-register pension schemes ‘where there is clear evidence that it is not being used to provide legitimate pension benefits within the tax rules’.
What action is required to continue a scheme without a sponsoring company?
Firstly, entrepreneurs rarely retire completely and they will often have another company or companies, which might be able to adhere to the SSAS prior to the sale or wind up of the original sponsoring company.
If this is the case, it could be possible to substitute the existing sponsoring company with the new adhering sponsoring company and the SSAS continues as normal. Depending on the scheme rules, it may only be possible for a new sponsoring company to adhere to the scheme rules, with the consent of the existing sponsoring company.
It would, therefore, be prudent to address this issue before any sale or wind up of the existing sponsoring company takes place, for example, by ensuring that the scheme rules are amended to permit the adherence even after the existing sponsoring company has been sold or wound up.
It would also be wise to make any other necessary amendments to the scheme rules so that the existing sponsoring company no longer has any powers under the scheme rules including, the power to amend the scheme rules, the power to appoint and remove trustees, and the power to admit new members to the scheme.
Failure to address these issues ahead of a sale or wind up of a sponsoring company might result in the scheme becoming almost impossible to administer or require expensive legal advice and assistance.
There are certainly sufficient reasons to employ a specialist SSAS practitioner or pension documentation specialist where company sales and SSASs are involved.
Martin Tilley is director of technical services at Dentons Pension Management