Avoid a pensions meltdown

Rejig your firm’s pension scheme to ensure survival and gain structural benefits

The implosion of US firm Dewey & LeBoeuf, blamed on a legacy of costly mergers and controversial bonus schemes, may not be a mirror image of practice in the wider UK legal market, but a growing number of firms are facing mounting financial liabilities over their pension schemes.

To many, the costs of such schemes have become too great. The liability comes from one of two sources. Commonly, a commitment by current partners sees retiring partners paid a pension for life, often based on a fixed amount or offering annual increases. But such schemes are only sustainable where profitability is maintained at or above existing levels – no mean feat, these days.

In the second scenario a firm may have contributed to a final salary ­occupational pension scheme for staff whereby liabilities have not been bought out in full. This could arise through the partnership’s single employer final salary scheme or an industry-wide one. The legal profession has seen a number of such schemes, some more successful than others, with some Scottish firms still counting the cost of their involvement in the Scottish Solicitors Staff Pension Scheme.

Pensions regulation – and, in particular the Pensions Act 1995 and its section 75, that requires employers to make good the deficit on an annuity buyout basis in certain circumstances – has changed the landscape. Firms struggling to fulfil their obligations are therefore looking to find a way to contain spiralling costs.

Where a partnership is dissolved a section 75 debt will be triggered. This could arise through the retirement of partners and a lack of willingness to find successors, burdened by a heavy commitment to the final salary ­pension scheme. An annuity buyout deficit is also triggered where an ­employer or the trustees decide to wind up the scheme.

In the wake of an annuity buyout, long-retired partners may be held ­liable for debts, sometimes for 10 or 20 years after retirement, because the firm has subsequently dissolved. Not surprisingly, with a deficit and significant commitment to its final salary staff pension scheme, recruiting new partners will be difficult. Banks will quickly lose interest in lending to it. 

The Pensions Regulator has recognised the challenges and laid down guidance on scheme abandonment. This is aimed at preventing partners from winding up the partnership and simply setting up a new one the next day without being pursued by the regulator to make up the deficit.

The good news is that it is possible to address such liabilities before it is too late, including scheme de-risking, achieved through an enhanced transfer exercise or pension increase exchange. Pensioners may also be given the option to take an annuity at a lower level than the full annuity buyout cost, or purchase an impaired life annuity instead of receiving standard benefit where an individual has a limited life expectancy.

However, there are signs the options will be reduced as the regulator considers updates to guidance. In the meantime, some firms are already taking advantage of restructuring their schemes, which will increase the odds of survival and secure ­financial and structural benefits.