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A money purchase scheme buy-out | Case studies | Quantum Advisory

A money purchase scheme buy-out

Helping Trustees to wind-up and transfer their money purchase pension scheme members to a new arrangement.

As risk transfer activity has been increasing in recent years, we thought it would be good to reflect on one of our old buy-outs to see what has changed in the market since they bought-out their money purchase scheme in 2006. One of our first clients was a well-known manufacturer with a factory located near our Cardiff office. Quantum acted as both adviser and administrator for their pension schemes.


Preparation and implementation 

In 1997, the client’s business was sold to another company. However, it was not until 2006 that a decision was made to wind-up the pension schemes. There were two pension schemes: 

  • a money purchase scheme and 
  • a final salary scheme. 

The options were considered by the Trustees and Sponsor and a decision was made to transfer all final salary scheme members’ benefits to the new company’s pension scheme. Quantum Advisory managed the transition and assisted the Trustees with the member communications (a critical area whenever any scheme changes are being considered). A transfer to the new company’s pension scheme wasn’t suitable for money purchase scheme members, so the Trustees sought advice from Quantum on how to secure those members’ benefits. At the time, a common solution was to use a ‘section 32’ buy-out policy and this was agreed by the Trustees as the most appropriate option for the members. This type of policy allows members to preserve their protected tax-free cash; it can also accept contracted out rights, which was important in this case, as some members had been contracted out on a protected rights basis which the recommended buy-out provider was able to accept. To implement the wind-up, the Trustees offered money purchase members the full range of options: 

To implement the wind-up, the Trustees offered money purchase members the full range of options: 

  • those who were old enough (50 plus at that time) could take retirement benefits (in the form of a tax-free cash lump sum and an annuity) 
  • those with small enough pots could take a winding-up lump sum 
  • anyone could transfer their pot to another scheme of their choosing, but not many people did so. 

The default option (for those who didn’t make an active choice) was the buy-out policy. This was the usual route in those days, although transferring to a Master Trust is more common for a lot of money purchase schemes winding-up now. A buy-out policy is still an option nowadays and may be attractive when contracted-out benefits are involved, rather than having to convert those benefits. Of course, today, we may also see an UFPLS added to the list of options but this is available only to the over 55s.



Finalising the buy-out 

The transfer to the buy-out policy took place in 2007, with winding-up lump sum payments, for members who had chosen that option, being made thereafter. It also took some time for age related rebates to come through for contracted out members and there were tax rebates to resolve, as well as final accounts to be produced, so the scheme was not finally wound up until a couple of years later. To help with future enquiries, we produced a list for the client showing which option each member had chosen. This did not stop Quantum getting enquiries from ex-members for many years afterwards and we were happy to assist those members who had contacted us. We feel this is a duty incumbent on administration teams as often members, or their dependents, find an old piece of correspondence regarding a pension scheme with our contact details and we are happy to pass on the new contact information during the period where we continue to retain historic member data.