This is the third party in our series of blogs on Pension Led Funding. This note concentrates on the precise nature of the loan. The first blog provided a general overview and the previous one set out how a scheme is set up.
RIght, we are at the business end of things!
PLF allows the Trustees of the scheme to make a loan of up to 50% of the value of the scheme assets to the Sponsoring Employer. This is expressly allowed by Finance Act 2004, s179 which provides the requirements for an authorised employer loan.
The requirements and restrictions placed on a loan to a Sponsoring Employer are summarized nicely in HMRC’s manual RPSM07400060 .
“Can a registered pension scheme make a loan to a sponsoring employer?”
A registered pension scheme may make a loan to the sponsoring employer or any party unconnected to the member.
There are 5 tests:
- The loan must be secured as a first charge on an asset of equal value.
- The loan must have a commercial interest rate (at least 1% above high street bank rates).
- The repayment period must not be longer than 5 years.
- The amount loaned must not be more than half the value of the scheme’s funds.
- Repayment of the loan must be in equal annual instalments.
Where any of the five tests are not met, the employer will be liable to an unauthorised payments tax charge.
For the purposes of the PLF, we will usually take security on a debenture issued by the Trading Company. This allows a security to be taken over the value of the Company rather than a fixed charge against the underlying assets of the Company.
However, it is possible that a charge could be taken against specific Company assets or, if preferable, against personal assets.
In all cases, the value of the asset must at least be equal to the value of the loan. Therefore, if the proposed loan is £50k, the value of the Company, in the example of a debenture, must be at least £50k (and preferably more).
We will only allow a Trustee to embark on this planning with us if they have obtained an appropriate formal valuation of the asset over which security is to be taken.
All employer loans must charge interest at a minimum of 1% above the average of the base lending rates of the following 6 leading high street banks:
- The Bank of Scotland
- Barclays Bank plc
- HSBC plc
- Lloyds TSB plc
- National Westminster plc and
- The Royal Bank of Scotland plc.
The average rate calculated should be rounded up as necessary to the nearest multiple of .%.
A pension scheme may make a loan at a fixed rate of interest as long as that interest rate is at least the rate specified at that time. As long as the terms of the loan remain unchanged there will be no requirement to alter the interest charged on the loan during its life.
The vast majority of loans issued under the PBF are fixed interest loans with the rate determined at the time the loan is made.
As described above, the loan must be repaid no later than 5 years after the loan has been made.
However, there is an ability to roll this loan over for another maximum five year period. This cannot be repeated.
HMRC Manuals confirm this, as follows:
Where an employer is having genuine difficulties making repayments and there is an amount of capital or interest outstanding at the end of the loan period, the loan period can be extended and the loan repayment date to be postponed or “rolled over” once for a period up to a further 5 years starting from the standard repayment date.”
50% limit on amount of loan
The maximum amount of the loan is 50% of the value of the pension scheme’s net assets.
This is tested only at the time immediately before the loan is made. It is therefore irrelevant (for this test at least) as to whether the investments lose value.
Any further advances made after the original loan was made are to be treated as a new loan made on the date the further advance was made.
Repayment of the loan
All loans to employers must be repaid in equal instalments of capital and interest for each complete year of the loan, beginning on the date that the loan is made and ending on the last day of the following 12-month period – known as a loan year.
If the loan is for less than a complete year, then the incomplete year is treated as the final year of the loan. The amount of capital and interest repayments payable each loan year are calculated by a statutory formula.