4 - Defined Benefits Flashcards
Who pays into a defined benefits scheme?
Both employee and employer but is employers responsibility to ensure there are sufficient funds in the scheme
Do defined benefits let you take a lump sum also?
Yes but reduces pension income
What is revaluation and escalation of a DB scheme protecting against?
Both increase by an index to combat inflation
Revaluation - Inflation upto taking benefits
Escalation - inflation when receiving benefits
Underpinned scheme
Based on both DC & DB scheme and will pay out dependent on whichever is the highest.
DC underpin:
- will receive higher of DB or DC
DB underpin:
- Receive contributions on DC basis but with a minimum level of earnings
Master trust for DB scheme
Full trust based DB scheme
MT - Tax efficient by placing pension scheme assets in trust by having separate sections for each employee but must be approved by TPR. Must have 1 board and 1 legal trust.
FT - Tax efficient by placing pension scheme assets in trust and employer appoints board of trustees for benefit of employees
DB scheme documents:
- scheme trust deed
- scheme booklet
- statement of investment principles
- statement of funding principles
- scheme trust deed - sets rules of DB scheme for trustees
- scheme booklet - sets rules of DB scheme and passed to employees
- statement of investment principles - sets key investment principles
- statement of funding principles - key areas of funding
Who sets who is eligible to join a DB scheme?
Employer but must abide by TPR rules for discrimination etc.
Do you have to retire to crsytalise DB scheme contributions?
No
When does service period of DB scheme begin from?
Date joined scheme not start of employment
Final salary definition
For exam use what as final salary definition unless states otherwise?
What will use to calculate what will receive as salary on retirement
12months
Open cheque book approach
Employers responsibility to ensure DB scheme is sufficient to cover payments
How often must DB scheme funding rate review be carried out to monitor contributions?
Atleast every 3yrs
(Employers usually contribute at least every 1yr)
What is member nominated trustees within DB scheme?
Right for members to elect 1/3rd of trustees with a minimum of 2 seats or 1 seat if scheme has less then 100 members
Scheme actuary
Carries out valuations of scheme for members and acts as an advisor for future changes to improve funds
DB scheme auditor
The person must be independent of all parties with no vested interest as they must audit the scheme, valuations and reports and make statements that give opinion of payments have been made in line with scheme schedule and if not, why not
Scheme investment manager
Make investments based on investment principles. Can be an employee or external individual/company.
Historical DB scheme:
Contracted out scheme - GMP & requisite benefits but what are the rules of a GMP?
Gave-up earnings related state pensions for DB scheme benefits and so NI class 1 contributions were reduced for these employees also.
GMP (guaranteed minimum pension):
- guaranteed level of earnings that must be higher than earnings related state pension
- 50% dependent pension paid if member died
- 1/80th accrual rate
- max. 40yrs at NPA 65 yrs old
- equivalent pension - DB scheme sometimes bought members back into earnings related state pensions
Bridging pension/integrated scheme
A schemes NPA is lower than the state pension age so the scheme pays a temporarily higher pension payment to bridge the gap.
DB escalation rules:
Non-contracted our benefits
GMP
Requisite benefits
Dates - 6.4.97 - 6.4.97 to 5.4.5 - post 5.4.5
NCB - none - 5% - 2.5%
Dates - pre 1988 - 1989 to 6.4.16 - post 6.4.16
GMP - gov. covered - 3% - gov. covers >3%
Dates - 6.4.97 to 5.4.5 - post 5.4.5
RB - 5% - 2.5%
Pension increase exchange
Members have choice of taking higher initial scheme pension in exchange for giving up some of inflation increases on offer
PCLS calculation formulas
Pg. 212
Death benefits for a DB scheme (2)
Death in service lump sum
Dependent pension
Nomination form
A member completes this form to select who they wish for their pension to go to on death. This is not legally binding as trustees can override this but ensures keeps tax advantages
When is death in service paid to beneficiary tax free and not tax free?
Tax free - If died pre age 75 if within members LTA. Anything above LTA taxable at recipients marginal rate
Taxable - If die age 75+ then entire sum taxable at 45% if paid to trustee or personal representative and/or recipients marginal rate
Dependent pension annual limit receivable?
Unlimited upto 100% of what member would have received. Taxable at recipients marginal rate as earned income
If take pension early due to ill health do you still pay tax?
Usual tax rules apply
3 rules to receive ill health retirement:
- unable to carry out usual occupation permanently due to ill health
- provide evidence from a health practitioner prior to receiving any payments
- if member recovers payments may cease
3 rules to receive pension due to serious ill health:
- have less than 12months to live
- provide evidence from a health practitioner prior to receiving any payments
- member will have scheme pensions capitalised
-if suffer serious ill health pre age 75 - usual tax rules apply
Or
If suffer serious I’ll health age 75+ - all lump sum paid taxable at marginal rate
Methods of topping up a DB scheme:
Additional voluntary contributions
Free standing additional voluntary contributions
AVC:
- Added years - made extra contributions which purchased additional years and can only be crystallised at the same time as main contributions
Defined contribution - invests additional contributions into a DC find so payment depends on annuity rates and markets. Can be crystallised at different time to main contributions if choose to
Free standing additional voluntary contributions
AVC that was available by insurance companies and completely separate to main DB scheme.
- Contributions built on a DC basis so can reduce or increase in value
- member can select scheme based on preferences and risk profile
- employee must meet scheme costs themselves in full so no help from employer
Can you make top-up payments to any scheme?
Yes, from A-Day
How are public sector scheme funded?
By contributions and public purse
Types of scheme funding
Funded schemes
Notionally-Funded schemes
Unfunded schemes
Funded schemes - contributions have been invested and built up
Notionally-Funded schemes - Some scheme assets but not many as mostly invested in GILTS (e.g. NHS pension)
Unfunded schemes - No scheme assets at all so scheme payments are met as they come (e.g. civil service pension)
Who regulates pension schemes?
The Pension Regulator
Transfer club
Available for public sector workers who can transfer contributions over to last employment and carry years of employment over also. No fees or costs and can increase pension to DB also.
What can you not transfer within transfer club?
Unfunded scheme to access flexible pension
What amount of assets must a DB scheme have?
Equal to liabilities if all had to be paid in one go
Section 179 valuation
Valuation for on-going schemes to establish the level of scheme based risk levy paid
Section 143 valuation (Insolvency valuation)
Carried out with the expectation the scheme will become insolvent
When is a DB recovery plan used?
Put in place by trustees
when DB is shown to be in deficit following a actuarial valuation.
If ‘significant’ changes made to a DB scheme must the members be consulted? And who by? And what is fine if do not consult members?
Yes if more than 50 employees
by trustees
£50,000 TPR fine
Winding up a DB scheme
It ceases to exist so move contributions to new scheme but must abide by termination clause set in scheme rules.
How are surplus DB payments returned to employers? (5)
- must be requested by employer and approved by scheme trustees
- confirmation from actuary surplus to requirement of having enough for insurance company cover of all DB benefits
- inform all members in writting
- tax surplus payment at 35%
- notify TPR once payment made
When is a DB scheme wind-up date set?
In future giving enough time for everything to be lined up for replacements to be found and notices to be sent to members
What is a paid-up DB scheme?
No new members can join and no further benefits can be accrued
Flexible benefits
Safeguarded benefits
DC scheme where members benefits relate to a fund value
Benefits that guaranteed or have an element of protection
Early leaver options of a DB scheme:
- Refund of personal contributions
- <2yrs service aka short service fund. No obligation for scheme to offer refund and only members contributions are refunded not employers
Tax:
First £20k taxable at 20%
Remainder taxable at 50%
Early leaver options of a DB scheme:
- Leaving scheme benefits preserved
- Must have 2 or more yes service aka short service benefit
- revaluation is carried out to inflation proof investment from time of investment to time of withdrawal
Early leaver options of a DB scheme:
- Crystallising scheme benefits
- If age 55+ and have 2+ yrs service then can crystalise DB scheme
Early leaver options of a DB scheme:
- Transferring CETV to another RPS
- Transfer funds from DB to another chosen scheme. Old scheme known as ceding scheme and new scheme reciting scheme.
- Follows usual ‘best estimate CETV rules’
- If a scheme is under funded then trustees may offer a lower CETV and TPR has set guidance on trustee s doing this. Trustees can also offer enhanced CETV to encourage transfers.
- If scheme has enhanced transfer value so members benefits are more of a liability then enhanced CETV may be offered
A member must seek independent advice if seeking a transfer sum of? And transferring funds into what? (3)
Seeking a transfer of £30,000+ when transferring funds into: (Evidende of this must be shown to current/ceding scheme)
- different RPS
- different part of existing scheme
- to gain access to flexible benefits
What is used for a member to decide if it is best to transfer their pension from their DB scheme?
Transfer value analysis system
Transfer value analysis system
Compares guaranteed benefits in a DB scheme with that what could be provided in shame possibly looking to transfer to and used the critical yield to do this.
Critical yield (when used for a transfer value analysis system)
Amount the DC scheme would have to grow to atleast match the guaranteed benefits of the current DB scheme
Can you use mortality rates for different sex? And how does this effect the critical yield?
No, increases the critical yield
What effect does an increase in CPI have on critical yield?
Increase the critical yield
What effect does an increase in episode leaving a DB scheme have on the critical yield?
Decrease the critical yield
What must you do when explaining risks of switching from a DB scheme to DC scheme to a client?
Explain ALL risks to the client
Is starting point to advice on a possible transfer from DB to DC scheme not to transfer or reason to justify leaving?
Starting point is not to transfer and acceptable critical yield cannot be only reason to recommend the transfer
How long do scheme trustees have to complete a DB scheme transfer to another scheme?
6 months
Appropriate transfer analysis
Must show why DB scheme transfer is suitable including both financial and behavioural analysis of client
Transfer value comparator
Compares DB lump sum value and compares (using FCA assumptions) with the value required to purchase an annuity to match DB income
Are flexible pension benefits available within a DB scheme?
No
What is independent advice regarding a pension transfer from a DB scheme?
Financial advisor and pension transfer specialist. Both must be included at all stages of reviewing circumstances and requirements
What is a triage services?
Execution only service for clients
Insufficiency report
Trustees can ask for this when a scheme is classed as underfunded
