PSI16.1.3 - Discontinuance of Schemes: General - Types of Discontinuance

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

The discontinuance of a scheme may be caused by the employer's bankruptcy or liquidation, or it may happen for some other reason at the discretion of the employer or trustees. In any event, scheme rules must set out clearly the circumstances and manner in which the scheme is to be discontinued. The existence of these provisions in an exempt approved scheme does not, however, affect the irrevocable nature of the underlying trust (see Part 1 Section 3). There are four possible forms of discontinuance and the terms we use are - closed; paid-up; wound-up; and abandoned. These descriptions are often applied very loosely by practitioners and it is therefore important to make sure that you know exactly what is meant when they are used by others. If you are in doubt, ask for a more detailed explanation, using the stock questionnaire PS199, if appropriate.

Closed:

A scheme is closed when its rules no longer permit new members to join. Generally the eligibility rule is amended so that no one can join the scheme after a stated date. Apart from this the scheme continues as before, contributions being paid as required by the rules and benefits continuing to accrue under the rules.

Paid-up:

Paid-up is one step beyond closure. No new members are admitted and no more contributions are paid. The trustees continue to hold the scheme assets to provide the accrued benefits, which are paid out in the usual way when they fall due. The term "frozen" is sometimes used by practitioners to mean the same thing as "paid-up". You should not however use this expression in correspondence. Make sure that you know exactly what is meant. A closed or paid-up scheme can be re-opened by appropriate rule amendments. Unless re-opened, both the closed scheme and the paid-up scheme must eventually be wound-up, for example, when the last pensioner dies.

Wound-up:

Winding-up is the final stage. The scheme is completely liquidated. All its assets are gathered in and the accrued benefits are secured by the purchase of annuity contracts from a Life Office (see Part 13 Section 4) or by transfer payments to other approved schemes or personal pensions schemes (see Part 14) or by assigning individual scheme policies to the members (see PSI13.4.2). Any surplus remaining is paid to the employer. When the winding-up process is complete, nothing is left in the scheme and the trustees will have completed their duties; the scheme will then cease to exist.

Abandoned:

A scheme which has

• not yet been approved
• is fully insured
• has less than 100 members
• none of the members have completed 2 years qualifying service, and
• the trustees are satisfied that the terms of the trust allow it,

may be abandoned and treated as if it never existed. (see PSI22.3.56-57 for procedures).

Where a member has completed two years qualifying service - defined in section 71 pension schemes act 1993 (PSA 93) - the member is entitled to preserved benefits within the terms of PSA 93. As the member is entitled to short service benefit (see PSI13.1.6-7) it is not possible to abandon the scheme.

To ‘abandon’ an approved scheme the approval must be formally cancelled by IR SPSS. It should be noted that cases where approval may be cancelled will be rare. (see PSI19.1.18 for details on cancellation of approval).