Trustee Guidance: Hybrid & Crown pension schemes
Hybrid pension schemes
Only the defined benefit element of the hybrid pension scheme is taken into account when assessing a pension scheme for entry into the Pension Protection Fund.
Trustees are allowed to discharge any liabilities in respect of money purchase benefits once a pension scheme failure notice has become binding.
The Pension Protection Fund can issue directions to trustees about the discharge of money purchase benefits in relation to hybrid pension schemes during the assessment period.
Underpinned hybrid pension schemes
Underpinned hybrid pension schemes are essentially money purchase pension schemes which are underpinned by a guaranteed minimum level of defined benefit which “kicks in” or “bites” if the amount from the money purchase pension scheme falls below the level guaranteed by the defined benefit underpin. For Pension Protection Fund purposes they are treated as a defined benefit pension scheme. It will be treated for assessment as above, with the exception that only the defined benefit underpin is taken into account.
Crown guarantees
Pension schemes with a full Crown guarantee are not eligible pension schemes for Pension Protection Fund purposes. However, where a pension scheme has only a partial guarantee the unsecured element of the pension scheme is eligible for Pension Protection Fund compensation.
For the purposes of the assessment period, it will be necessary to apply the various restrictions and controls to the whole pension scheme, such as:
- any directions issued by the Pension Protection Fund in relation to the pension scheme will need to be applied to the whole pension scheme during the assessment period. Although the Pension Protection Fund will only assume responsibility for the unsecured part of the pension scheme, decisions taken by pension scheme trustees about matters for which directions can be issued – ie investment of assets, incurring of expenditure or conduct or legal proceedings – in relation to the whole pension scheme will invariably affect the unsecured part of the pension scheme for which the Pension Protection Fund may assume responsibility at a later date; and
- the valuation of the whole pension scheme will be required but the assets and liabilities will need to be separated into secured and unsecured elements because the Pension Protection Fund can only take into account the unsecured element.
A second valuation will be necessary before the Pension Protection Fund assumes responsibility for the unsecured part, to take account of any changes to the assets and liabilities of the pension scheme as a whole during the assessment period.
Created May 2006
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