Intro

Overview of Establishin and Discontinuing a Pension Scheme

• Complex Process
• Importand decisions
• What type of pension arrangement is needed?  large OPS set up under trust; contract-based personal pension
• What benefits should the scheme provide?
  • choice of benefit structure determines amount member receives; cost to employer; who bears the risk
  • DB or DC
• Arrangement created
  • TDR or contract
  • documentation drawn up to evidence arrangement and explain benefit structure
  • changes may be needed throuhout its life 
  • Register with HMRC
• End of its life
  • closed to new members/future accrual 
  • wound up and secure members benefits

• Established by employer to provide benefits to employees and administered in UK
• Covers wide range of schemes, from those formed by a letter to large complex schemes.
• Regulated by requirements of PA04, Pensions Act 1995 and Pension Schemes Act 1993
• Either DB or DC - describe
  • difference:  funded; burden of risk
• Previously member couldn't have both OPS and Personal Pension

• Not an occupational pension scheme, established by person with permission under FSMA2000 therefore usually provided by insurance companies.
• First started 1 July 1988 - purposes of those who did not have access to OPS or wanted to leave OPS
• Power of employee to leave OPS lead to mis-selling scandal
• must be registered
• Can join up to age 75
• Money purchase basis

• Employer Financed Retirement Benefit Scheme
• Formerly known as an Unapproved Scheme
• Employer meets pension obligations out of its own resources - no prior funding.
• Payments are tax deductible as business expenses.
• FA89 - Popular because of earnings cap - linked to RPI
  • wage inflation exceeds price inflation so gradually affected more and more people
  • could provide more than 2/3 earnings cap
• Employee does not suffer any tax liability on notional cost of benefits promised
• Exchange of letters (employment contract)
• Notional cost reflected in accounts
  • Like book reserve schemes
• Can now be backed up by insurance
• Lump sum or pension
• Now unattractive because of lifetime allowance

Outline a Funded ERFBS, including their advantages (1) and disadvantages (3).

(5)

• known as FURBS 
• Disadvantages:
  • Employee taxed on employer contributions as a benefit in kind;
  • also subject to NI contributions;
  • income in fund taxed at trustee rate (40%);
• Advantage:  Offered better security for benefits.
• exchange of letters or within contract of employment or by means of trust deed.
• Since A-Day FURBS lost its tax advantage in relation to inheritance tax.

Notes on Insured Schemes (6)

• The sole investment medium is the insurance policy
• Large scheme:  investment vehicle for some/all of assets
• Small scheme:  individual insurance contracts
• policyholder is trustee and benefits paid to trustee
• advantages:  regulated by FSMA 2000; protection from FSCS
• Disadvantage:  premium payable; reduced return on assets

Notes SSAS (6)

• Requirements:
  • max 12 members
  • at least one member being connected with another, with a trustee or employer
  • not investing in insurance companies
• members are trustees/directors and shareholders
• special tax provisions pre A-Day - now removed

• Excluded from having to be authorised to make investment decisions as long as all members were trustees.
• 5% restriction on self investment does not apply.
• 25% of fund value could be loaned back to employer withing the first 2 years, after that 50% could be loaned. 
  • Requirements:
    • For specific commercial purposes
    • On 'commercially reaonable terms' - interest rate 3% above base rate
    • No longer than necessary
    • Properly documented

• Where a multi-national company operates in a number of EU member states through subsidiary companies and wishes to consolidate pension arrangements in one Member State
• Where an employer in one EU Member State wishes to site its pension scheme in another Member State for commercial reasons.

1. Must be registered by a relevant supervisory body
2. Must ensure all technical provisions are calculated by an actuary/auditor on the bases of actuarial methods recognised by the Member State
3. Be effectively run by perons of good repute
4. Be governed by properly constituted rules regarding its operation, where the members have been informed of those rules
5. Where the sponsoring employer guarantees the payment of benefits, that employer must also be committed to meeting the costs of those benefits regularly.
6. Ensure scheme members are sufficiently informed of the conditions of the scheme.
7. Fully funded - thus annual valuations and shortfall eliminated within 24 months.