Invensys Pension Scheme has exceeded full funding on a technical provisions basis and has taken the unusual step of terminating a reservoir trust that was set up to provide funding security after the employer was purchased.
Schemes and employers with reservoir trusts in place can decided to terminate them when deficit-reduction plans hit certain triggers, but industry experts urged those doing so to take care to avoid tax pitfalls.
If the scheme has changed significantly you might look to wind up the trust
Simon De Young, PwC
Following the sale of its rail division in May 2013, the Invensys scheme received a £400m cash contribution, and an additional £225m was put into a reservoir trust.
“This was available to fund the scheme in the future, if necessary,” said Kathleen O’Donovan, chair of the trustees for the scheme, in a summary of the scheme’s position.
The contribution of £400m combined with investment outperformance helped move the scheme to a £16m surplus on March 31 2014, from a £445m deficit the previous year.
The reservoir trust was terminated as part of an agreement with Schneider Electric, which bought the sponsoring employer in January this year.
The agreement stated the proceeds of the termination be split evenly between the scheme and employer, increasing the scheme’s assets by approximately £105m. This increased the scheme's surplus to £121m on a technical provisions basis.
Jennifer Chambers, senior associate at law firm Burness Paull, said the termination of the trust was likely due in part to the scheme reaching a funding-level trigger. “I’ve never come across it being so short lived,” she said.
Relatively few reservoir trusts exist, so it is unusual that they are terminated – though there are a number of reasons why they may be.
Simon De Young, a tax partner at consultancy PwC, said a change in the scheme’s objectives could lead to a termination of the trust.
“If the scheme has changed significantly you might look to wind-up the trust,” he said, adding: “Quite often they’ll be wound up if you decide to buy out the pension scheme.”
Stuart O’Brien, partner at law firm Sackers, said employers looking to wind up their reservoir trusts should be mindful of the potential tax pitfalls when doing so.
“The employer will need to take quite careful tax advice to make sure the money going into the scheme gets the right tax relief,” he said. “Particularly with in specie transfers.” Such transfers involve assets moving directly from the trust to the scheme.
O’Brien said they may be used to minimise the risk of the scheme losing money through the liquidation and repurchase of assets.
Schneider Electric agreed to guarantee the obligations of participating employers in the scheme for up to £1.75bn as part of the agreement with the pension scheme. It has since agreed to sell Invensys’ appliance division for £150m.
Reservoir trusts are typically set up to hold cash and bonds, but Chambers said there may be scope for using them to hold property assets.
“I’ve had one query on property,” she said. “We don’t have a concrete answer of whether property can be used. I don’t see why not, but I’ve never seen it.”
