This second article in our series on managing pension schemes in insolvency takes you on from finding scheme details to understanding the types of scheme in use.

All non-state pension schemes are either occupational pension schemes or contract-based pension schemes. But within these broad divisions, there are further variations.

With many companies operating a mix of scheme types over the years – and with employees often being members of more than one scheme – it’s vital to understand the differences so you can deal with each scheme appropriately.

Occupational pension schemes operate as discretionary trusts in which employers can act as both a corporate trustee and as scheme administrator. Employers must pay both the employer and employee contributions to scheme trustees by the 22nd day of the following month (19th for cheque payments).

If you have found a scheme through the Pension Protection Fund (PPF) s120 Notification Service or the DWP Pension Tracing Service, it should be an occupational scheme. For each occupational scheme you must submit S120 and S22 statutory notices (unless the scheme was wound up before an IP was appointed).

Occupational schemes are regulated by the Pensions’ Regulator (TPR).

The occupational pension category covers three main types of pension: defined contribution schemes, defined benefit schemes, and hybrid schemes.

Defined contribution schemes are now the most common type of occupational pension. Funds are built up through an agreed level of contributions and invested. The level of benefits each member gets depends on how much their individual pension pot is worth when the member retires.

Typically, the amount paid in is a percentage of earnings, with both employer and employee contributing. It may also be a fixed amount.

In most cases, individual members take on the investment risk. But employers may also have some responsibility, so you should check with the pension provider to make sure.

Types of defined contribution schemes include:

Money purchase schemes

Executive Pension Plan (EPP) – schemes normally used for directors and senior managers, also known as a One Man Pension Arrangement (OMPA)

Small Self-Administered Schemes (SSAS) – a variation on an EPP scheme

Master Trusts – multi-employer schemes where each employer has its own division within a single master trust arrangement (for example, auto enrolment-inspired schemes such as NOW:Pensions, NEST, and People’s Pension).

Defined benefit or final salary schemes are designed to provide a secure income for life. The level of income a member is set to receive is calculated based on the number of years the employee has been a member of the scheme and on ‘pensionable earnings’, typically either salary at retirement or average salary.

Both employer and employee can contribute to the fund, but trustees take responsibility for investment and have a duty to ensure the scheme has the funds to meet its obligations. Most schemes are set up in such a way that the responsibility for any shortfall falls to the employer.

With costs rising and the economy uncertain, it’s no surprise that so many businesses are closing down their final salary schemes.

Defined benefit schemes can lead to large claims on the estate.

Schemes can sometimes be split between defined benefit and defined contribution elements. In some cases, a defined benefit element is used to provide a minimum underpinning amount. A hybrid scheme can therefore also lead to a large claim on the estate.

Contract-based pension schemes are money purchase schemes, and can on the surface look very similar to occupational defined contribution schemes. However, the key difference is that they are usually operated by insurers or investment platforms, with the pension provider taking responsibility for the scheme rather than the employer/trustees. Members have individual contracts with the pension provider, and the employer pays the agreed contributions to the provider.

Contract-based pensions are regulated by the FCA and TPR.

Types of contract-based pensions include:

Group personal pensions (GPPs)

Group stakeholder pensions (GSHPs)

Group self-invested personal pensions (GSIPPs)

You do not need to submit statutory notices for contract-based schemes.

If you’re short on time or pensions expertise and concerned that your pensions work isn’t getting the priority it needs, we can help.

See our ERA Pensions page for details.