Occupational Trusts: How They Help Manage Workplace Pensions

When it comes to workplace pensions, the financial security of employees is a key concern for both employers and employees. One of the most effective ways to safeguard pension funds is through the use of occupational trusts. If you’re looking to understand how these trusts work and how they help manage workplace pensions, this guide is designed to provide clear and detailed insights.

At Blackstone Solicitors, we have a wealth of experience in advising on occupational trusts, pensions, and asset management across England and Wales. This article explores the role occupational trusts play in managing workplace pensions, ensuring that funds are securely held and managed in the best interests of employees.

Please click here to find out more about our Private Client services

Free Initial Telephone Discussion

For a free initial discussion with a member of our New Enquiries Team, get in touch with us today. We are experienced in dealing with all the legal aspects of Trusts and once instructed, we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you are on the best possible footing from the start and also avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.

What Is an Occupational Trust?

An occupational trust is a legal structure that holds and manages the assets of a workplace pension scheme. It is set up by an employer to safeguard pension funds on behalf of employees, with the trust being managed by appointed trustees.

The purpose of an occupational trust is to ensure that the pension contributions made by both the employer and the employees are used solely for the benefit of the scheme’s members. The assets in the trust are kept separate from the employer’s own finances, providing a layer of protection should the company face financial difficulties.

How Does an Occupational Trust Work?

At its core, an occupational trust functions like any other trust in that it involves three key components:

1. The Settlor
   The employer, who sets up the trust and contributes to the workplace pension scheme, is referred to as the settlor. The employer establishes the rules for the trust, often through a legal document called a trust deed, which outlines how the pension scheme will be managed.
2. The Trustees
   Trustees are individuals or organisations appointed to manage the trust’s assets. They have a fiduciary duty to act in the best interests of the beneficiaries (the employees). Trustees must make sure that pension funds are invested wisely, comply with legal requirements, and ensure that the pension scheme remains financially viable.
3. The Beneficiaries
   The employees participating in the workplace pension scheme are the beneficiaries of the trust. As beneficiaries, they are entitled to receive the pension benefits outlined in the trust deed upon retirement or in specific situations, such as death-in-service benefits.

Once the trust is established, contributions from both the employer and employees are paid into the trust. The trustees then invest these contributions to grow the pension fund over time, ensuring that there are sufficient assets to provide the promised benefits when employees retire.

The Role of Trustees in Managing Workplace Pensions

The trustees play a crucial role in managing the occupational trust. Their responsibilities go beyond simply administering the pension scheme; they are legally bound to act in the best interests of the beneficiaries. Here are some of the key duties of trustees in the context of workplace pensions:

1. Asset Management
   Trustees are responsible for ensuring that the pension contributions are invested in a way that maximises returns while managing risks. Trustees typically work with professional investment managers to build a diverse portfolio, balancing short-term and long-term financial goals. The aim is to grow the pension fund over time, ensuring that it can meet the future pension liabilities of the scheme’s members.
2. Compliance with Regulations
   Occupational trusts must adhere to a range of legal and regulatory requirements, particularly those set by The Pensions Regulator (TPR). Trustees must ensure that the trust complies with the Pensions Act and other relevant legislation, which includes maintaining accurate records, submitting regular reports to TPR, and making sure that the scheme is sufficiently funded.
3. Acting in the Beneficiaries’ Best Interests
   Trustees have a fiduciary duty to act in the best interests of the scheme members. This means making decisions that will benefit the employees, whether that’s choosing appropriate investments, setting contribution rates, or handling benefit payments. Trustees must always prioritise the financial security of the pension fund and avoid conflicts of interest.
4. Ensuring Adequate Funding
   Trustees must regularly assess the financial health of the pension scheme. If there are concerns that the scheme may not have enough assets to meet its obligations, the trustees must take steps to address the shortfall. This could involve negotiating additional contributions from the employer or adjusting the investment strategy to improve returns.

Benefits of Occupational Trusts in Managing Workplace Pensions

Occupational trusts provide a number of key benefits for both employers and employees when it comes to managing workplace pensions:

1. Asset Protection
   One of the most significant advantages of an occupational trust is that it separates the pension assets from the employer’s own finances. This ensures that the pension funds are protected even if the employer faces financial difficulties, such as insolvency or bankruptcy. By placing the funds in a trust, they are shielded from creditors and cannot be used for anything other than the employees’ pension benefits.
2. Tax Advantages
   Occupational trusts offer tax benefits for both employers and employees. Employer contributions to the trust are typically tax-deductible, reducing the overall tax burden on the business. For employees, contributions to occupational pension schemes generally qualify for tax relief, helping them save more efficiently for retirement. The funds held in trust also benefit from tax-efficient growth, with investments growing free from income tax and capital gains tax.
3. Professional Management
   With trustees overseeing the administration of the pension scheme, there is a high level of professional management involved in an occupational trust. Trustees often work with experienced financial advisors and investment managers to ensure that the pension funds are managed prudently, with the goal of growing the assets while minimising risk. This ensures that employees’ retirement savings are in safe hands.
4. Tailored to Employees’ Needs
   Occupational trusts can be designed to offer a range of pension and employee benefits. These trusts are not limited to retirement pensions but can also include additional benefits, such as death-in-service payments or early retirement options. This flexibility allows employers to create pension schemes that are tailored to the specific needs of their workforce, ensuring that employees are well-provided for throughout their careers and beyond.

Common Types of Pension Schemes in Occupational Trusts

Occupational trusts are commonly used to manage two main types of workplace pension schemes:

1. Defined Benefit (DB) Schemes
   In a defined benefit pension scheme, the employer promises to pay employees a specific pension upon retirement, typically based on their salary and years of service. The employer bears the responsibility for ensuring that there are enough assets in the trust to meet these pension commitments. Trustees play a critical role in managing the trust’s assets to ensure that the scheme remains fully funded.
2. Defined Contribution (DC) Schemes
   In a defined contribution pension scheme, the pension payout is based on the contributions made by both the employer and employees, as well as the investment performance of the trust’s assets. Unlike defined benefit schemes, the employee bears the investment risk, as the final pension amount depends on the performance of the trust’s investments. Trustees are responsible for ensuring that the contributions are invested wisely to provide employees with a strong return when they retire.

Challenges of Managing Occupational Trusts

While occupational trusts provide many advantages, they also come with certain challenges:

1. Ongoing Governance
   Trustees must ensure that the trust is managed in compliance with ever-evolving legal and regulatory requirements. This can involve significant administrative work, as trustees need to keep up with changes in pension laws, tax rules, and investment regulations. Regular audits and reporting are essential to ensure that the trust remains compliant.
2. Investment Risk
   Managing the investments within an occupational trust involves balancing risk and reward. While trustees aim to grow the pension fund, they must also be mindful of market fluctuations, inflation, and other factors that could affect the trust’s long-term financial health. Professional investment advice is often essential to help trustees make informed decisions.
3. Funding Shortfalls
   In defined benefit schemes, if the trust’s assets underperform or if the scheme is underfunded, the employer may be required to make additional contributions to meet the pension obligations. This can place financial pressure on the business, especially if the shortfall is significant.

Conclusion

Occupational trusts are a vital tool in managing workplace pensions, providing security, professional management, and legal protection for employees’ pension funds. For employers, these trusts offer a flexible and tax-efficient way to administer pension schemes while ensuring that the assets are safeguarded.

How we can help

We have a proven track-record of advising upon all aspects of private client work. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.to incorporate, what kind of ownership

How to Contact Our Private Client Solicitors

It is important for you to be well informed about the issues and possible implications of dealing with trusts. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.

To speak to our Trust solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in Blog, News Tagged as

Comments are closed.