Can an employee get tax-free compensation for closing a DB scheme

[Brendan Burgess]

A friend told me that his company was considering winding up their deferred benefit pension scheme. And that the proceeds would be paid directly to the members as cash.

I told him that this was not possible. I guessed that the fund would be converted into a defined contribution fund or a buy-out bond.

There could be compensation for surrendering employment rights, but it would have to be proportionate.

Any scheme for winding up a defined benefit scheme would have to be approved by the Revenue.

Am I correct?

 

[Baracuda]

This is a highly unlikely story but is technically possible to a certain degree.

About 75% to 90% of all DB scheme’s are underfunded at the moment depending on who’s publishing the figures. As a result, if a scheme was winding up it would have to in the following order, buy a annuity for all retired members. In the case of member’s AVC’s the full value of their assets has to be transferred into an alternative pension product. After this is done the remaining value of the assets must be divided between the active and deferred members according to their accrued rights.


In summary and to answer your question. In the case of a scheme being underfunded (or a breakeven situation) the members benefits must be transferred to another pension arrangement. In the very rare case of the scheme being overfunded there is an option where the member can be refunded the surplus subject to Pension Board and Revenue approval. There was a case of this in the last 5 to 10 years (I think it was Arrnot’s ). The scheme was in surplus and the surplus was distributed back to its members. They got a nice little windfall at the time and RTE covered the story.

 

[Brendan Burgess]

In summary and to answer your question. In the case of a scheme being underfunded (or a breakeven situation) the members benefits must be transferred to another pension arrangement.

Thanks Baracuda

The scheme is underfunded so as I expected.

Brendan