Gary Cullen: Firms must take great care if tempted to plunder pensions

HARDLY a week goes by without the launch of another UK government-backed initiative to boost access to finance, but many cash-strapped businesses are still facing an uphill struggle to secure affordable funding.

Some are turning their sights to corporate pension schemes in an attempt to keep the business afloat.

However, dipping into the pension fund or using employee pension contributions to shore up the business could spell real trouble for the trustees, who are sometimes also the company’s directors and shareholders. In the worst-case scenario, such action would result in the Pension Regulator appointing an independent trustee and taking away the lay trustees’ powers.

Faced with the prospect of pushing the employer over the edge, with the inevitable result of the scheme being forced into the Pension Protection Fund (PPF), trustees are left with the unenviable task of deciding the best route for the scheme and its current and future pensioners.

The compensation offered by the PPF is considerably less than the full benefit entitlements, after taking into account reductions to spouses’ pensions, pension increases and other matters. As a result, the headline figure of 100 per cent compensation for the pensioners and 90 per cent compensation for those on deferred benefits can often be skewed by a range of reductions in benefits, tucked away in the small print of the legislation.

Pension scheme trustees must ensure they understand their duties. In particular, they must safeguard contributions collected by the company and ensure these are paid into the scheme in line with the agreed schedule of contributions and not used for anything else. Company directors also have a duty to their employees not to betray the trust between an employer and employee by holding on to contributions deducted from pay and using them for other purposes.

Employers are required under the Pensions Act to pay contributions into the scheme in a timely manner and in line with a schedule of contributions. In addition, employers must also, as part of individuals’ contracts of employment, hand over the agreed employee contributions deducted from the payroll to trustees within the required timescales.

While there is scope for employers to review the schedule of contributions with trustees, it is fraught with potential difficulties. Trustees must, therefore, fully understand the implications before making any agreement with the company.

This will reduce the likelihood of a comeback on the employer and trustees, if the trustees also happen to be the directors and owners of the company. It will also reduce the risk of being reported to the Pensions Regulator for failing to pay contributions on time, where there is a clear conflict of interest.

The downturn has forced a number of employers to negotiate payment extensions to eliminate a deficit. However, even with a considerable extension, some employers are struggling to pay sufficient contributions to keep scheme trustees happy and the Pension Regulator on side.

Any such changes must be agreed in advance with the trustees, and employers must not take unilateral action irrespective of the trustee’s views. An independent trustee should represent the trustees, to prevent any comeback against the lay trustees at a later stage.

The Pensions Regulator has a keen interest in cases where funding plans are extended or where payment of contributions are not made on time. While previously a criminal offence, such action could now be deemed a civil offence.

Several options may be available to directors and trustees where the business has come under pressure. However, as across all business, good governance is paramount.

Where trustees are also the company owners and directors, with the prospect of a conflict of interest, it is a good idea to have an independent trustee carry out all negotiations on behalf of the pension scheme with the company.

To safeguard the interests of all stakeholders, company directors and trustees must ensure they fully understand the implications of difficult decisions. This will prevent the scheme and individuals involved from falling foul of complex legislation.

• Gary Cullen is a partner and head of the national pensions unit at law firm Maclay Murray & Spens