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R04 - Pensions > 5 - Defined Benefit Schemes 16 > Flashcards

5 - Defined Benefit Schemes 16 Flashcards

1
Q

What are some types of hybrid schemes?

A

DB scheme with DC underpin:
- Offers transfer value
- Provides pension benefits or earlier death at higher of benefits on DB or DC plan

DC scheme with DB underpin:
- DC cont benefit with min level of pension related to final salary

Defined Cash schemes
- limited benefit provided so fell within pre-A day HMRC limits for tax-free cash alone

Career average scheme
- Formulae to determine benefits is based on average earnings over a members career and not on their earnings near a set age

Integrated scheme - inc state pension deduction

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2
Q

What is AVC

A

Additional voluntary contributions - typically before A day where members of occupational schemes could buy extra benefits

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3
Q

Who often meets the cost of meeting an inhouse AVC

A

Employer

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4
Q

What are the two ways In-house AVC can be administered

A
  1. DC Basis
    Member AVC cont invested into DC fund, proceeds used to provide additional income in retirement
  2. On an added year basis
    Where AVC arrangement is offered within DB scheme - can use VC cont to buy added years of service to scheme
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5
Q

What is bridging pension?

A

Scheme normal pension age is lower than SPA so member normal pension age a higher pension is paid until SPA then lowers.

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6
Q

Definition of pensionable service

A

Laid out in scheme rules - employee period of membership of scheme, may not start until waiting period has been completed

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7
Q

Definition of pensionable remuneration

A

Members basic salary at retirement/death, some other rules adds bonus.

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8
Q

Definition of Accrual rate

A

The rate at which scheme benefits accrue for each year of pensionable service

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9
Q

What is funding rate

A

Scheme actuary will calculate level of contribution required on regular basis, which must be at least every three years

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10
Q

Cost of providing DB benefits:

A

Cost of providing DB benefits:
* Level of members final pensionable remuneration in future
* Investment returns
* Annuity rates
* Number of members who die
* Profile of scheme membership

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11
Q

How is pension in payment taxed

A

Earned income

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12
Q

Did many members prior to 2016 who had DB schemes have other pensions?

A

No additional state pension benefits, SERPS, S2P for period of pensionable service

Scheme had to provide a min level of benefits to replace state benefits given up

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13
Q

When was contracting out abolished

A

06/04/2016

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14
Q

Statuory escalation of benefits in payment; member reached SPA before 06/04/2016

A

Pre-1988 GMP: Scheme does not provide any escalation - state is responsible for paying increases to GMP
GMP accrued between 1988 and 1997 - scheme is responsible pay increase to GMP in line with CPI
Non-GMP accrual prior to 06/04/1997 - no requrement for statutory increase
pension for ser vice after 05/04/1997 but before 06/04/2005 - must escalate in payment in line with CPI to max 5%
Pension for service after 05/04/2005 - must escalate in payment with CPI to 2.5%

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15
Q

Statuory escalation of benefits in payment; member reached SPA before 06/04/2016

A

Pre-1988 GMP: Scheme does not provide any escalation -
GMP accrued between 1988 and 1997 - scheme is responsible pay increase to GMP to max 3%
Non-GMP accrual prior to 06/04/1997 - no requrement for statutory increase
pension for service after 05/04/1997 but before 06/04/2005 - must escalate in payment in line with to max 5%
Pension for service after 05/04/2005 - must escalate in payment with to 2.5%

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16
Q

What is pension increase exchange?

A

Offers a pension increase exchange where member is offered giving up future guaranteed increases to pension in return of higher initial pension with no future increases other than statuory increases.

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17
Q

Why is it pension increased exchange popular with defined benefit schemes

A

Pensions that escalate in payment are expensive
Cost of increase is unkown
Employer does not suffer large one off cost

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18
Q

What are some benefits/drawbacks of Pension increase exchange

A

A member may prefer a higher intial income while they are active and healthy in the early years of their retirment

The member may be also entitled to a higher PCLS if the scheme calculates the entitlement as the maxiumum permitted under HMRC rules

A member in poor health or with a less than average life expectancy may end up better off with higher intiial pension

Drawbacks:
If they live longer
Value of benefits are tested higher
Where pension increase exchange

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19
Q

What are the regulator principles

A

Clear, fair and not misleading
Open and transparent
Manage conflicts of interest
Trustee consultation
Independent financial advice

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20
Q

What are the seven principles: A code of good practice

A

No cash incentive
Advice
Communication
Records
Sufficient time
Members who are over aged 80
Roles and responsibilities

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21
Q

What is an incentive exercise?

A

An invitation or inducement provided to a member to change the form of their accrued DB rights in a UK registered pension scheme, which meets bothof following tests:

one objective of providing it to reduce the risk or cost for the pension scheme or sponsers
It is not ordinarily available to members of the pension scheme

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22
Q

T/F: A scheme that was contracted out before 06/04/2016 can allow for GMP to be exchanged for cash

A

False

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23
Q

Can PCLS and pensions be calculated separately

A

Yes for DB schemes

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24
Q

What is commutation factor?

A

A reduction in generally the pension as a result of the PCLS.
It will be done in a ratio.
E.G. A commutation factor of 12:1 meants that for every £12 of PCLS the pension is reduced by £1

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25
Q

What ha[[ems where PCLS and Pension are provided separtely? To hthe pension figure

A

Pension figure multipled by factor of 20 + PCLS is added to it.

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26
Q

When can commutation of a members pension take place

A

Any age even after 75 (but for DB schemes the entitlement only applies to benefits that are yet to be crystallised/ drawn)

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27
Q

Is the payment of a serious ill health lump sum a BCE before 75

A

YES

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28
Q

Is the payment of serious ill health sum taxed before 75

A

No as long as value of benefits do not exceed member remaining lifetime allowance

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29
Q

Is the payment of serious ill health sum taxed after 75

A

Yes as receipient income as PAYE

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30
Q

What does the Pension Act 2004 require DB schemes to undertake each year

A

Actuarial scheme valuation

potentially every 3 years - where scheme trustees obtain actuarial reports in interevening years

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31
Q

What does actuarial scheme valuation do

A

Details any develpoments that impact on size of scheme liabilities

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32
Q

What is statutory funding objective?

A

Scheme trustees must ensure that scheme funding meet scheme technical provisions - amount of assets needed to cover the scheme future liabilities as they fall due

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33
Q

What are scheme assets valued at

A

MV

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34
Q

When should the schedule of contributions must be produced?

A

Within 15 months of valuation effective date

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35
Q

What is IAS 19

A

International Accounting Standards 19:
Give direction on accounting treatment of DB assets and liabilities - aims to make pension scheme more transparent

36
Q

What is a section 143 valuation
When is it used?

A

When a scheme enters PPF.
Section 143 valuation is theoretical cost of buying out scheme benefit with an insurance company.

37
Q

How is the valuation for section 143 based?

A

It is based on PPF entitlement of each member not full entitlement. The present value of past service liabilities is calcualted using a discount rate based on gilt yields.

38
Q

What is PPF section 179 valuation

A

Similiar to Section 143 valuation.
Valuation basis is used to determine the level of scheme underfunding and this in turn is use scheme risk-based ppf levy

39
Q

If ongoing valuation reveals that a scheme is in deficit who is responsible

A

Trustees who must stend a recovery plan to TPR

40
Q

What was the changes issued in the government White Paper 2018

A

Strengethening of Pension Regulator powers
Defined benefit funding code of practice
Consolidation

41
Q

What is statement of strategy and who must it be signed by

A

Part of TPR long term objective plan - must be signed by trustee chair

42
Q

What are the two ways trustees can choose to comply with new rules issued by TPR

A

Bespoke/fast track approach

43
Q

What is a consolidator scheme?

A

A DB scheme which pension scheme liabilities can be transferred

44
Q

What do trustees of DB schemes have to agree with employers on as aresult of Pension Schemes Act 2021

A

Funding and investment strategy
+
Written statement of strategy

45
Q

Can a person with a criminal record be a trustee

A

Yes as long as they do not have unspent conviction for deception/dishonesty

46
Q

What are the trustees responsibilities in pension

A

Obtain auditied accounts
Obligation to report delays in payments of contribution of more than 30 days
Draw up statement of investment principles

47
Q

What are the trustees powers in pensions

A

Hold scheme assets
Determine all questions and doubts in connection with scheme
Carry out any transaction in schemes

48
Q

How many members of a trustee scheme must be member nominated

A

At least 1/3 of trustees

Unless every member of scheme is trustee
One member
all trustees independent
scheme is small insured scheme

49
Q

What are trustees formally required to appoint (advisors)

A

Auditor
Actuary
Fund manager

unless fund is wholly invested in insurance - no need fund manager
Arrangement is earmarked and insured - no need auditor/actuary

50
Q

What is a Scheme actuary

A

Provide periodical actuary valuation
prvode advice about funding princples
Investment factors

51
Q

What are some conditions of a scheme auditor

A

Must be appointed by trustee
Must hold practicing certificate
Be a registered auditor
Not be member of scheme, employee of trustees or connection with trustees

52
Q

Can a scheme actuary be a trustee

A

Yes

53
Q

Who is responsible for registering pension scheme with HMRC - deals with HMRC in general

A

Scheme Administrator

54
Q

Who is responsible for tax relief in pensions - relief at source method

A

Scheme administrator

55
Q

Who is responsible for tax liability on refund of contributions

A

Scheme administrator

56
Q

What is the taxation treatment of refund of employee contributions

A

First 20k - taxed 20%
Excess taxed 50%

57
Q

How can you be entitled to a preser ved pension

A

Rules of scheme permit
They have completed more than two years service

58
Q

How many ways can GMP be revalued in deferment

A

3

59
Q

Revaluation of preserved benefits within a DBa scheme

A

Exit before 1/01/1986 - no compuslory revaluation
1/01/1986 -> 31/12/1990 -> In line with increase in CPI to max 5% pa from 01/01/1985
1/01/1991 -> 05/04/2009 -> In line with increase in CPI to max 5%
05/04/2009 -> present - in line with CPI to max 5% to 05/04/2009 -after 2.5% -> present

60
Q

How long do you have to work to get a CETV in DB scheme

A

3 months

61
Q

What are the 4 steps involved to calculate CETV

A
  1. Calculate the member preserved pension at date of leaving
  2. Revalue the preserved pension up to scheme normal pension age
  3. Calculate the capital cost of buying the revalued pension at normal pension age
  4. Discount this capital cost at retirement to present to provide its current capital value
62
Q

What are some ways that employers/trustees do to DB schemes to reduce liabilities

A

Offer enhanced transfer value for a limited period (to reduce cost)

63
Q

What type of benefits are benefits held in DB schemes

A

Safeguarded benefits

64
Q

What are some conditions that must be met for a member to transfer out of DB scheme

A

Benefits are uncrystallised
The member has ceased accrual within scheme
The member has applied and received statement of entitlement
Member has made an application to transfer benefits at leasst one year before they reach scheme normal pension age

65
Q

How much money is required before a member must receive independent advice to transfer out of safeguarded benefits

A

30k

66
Q

Who is expected to pay for the advice to transfer out of safeguarded benefits

A

Member will unless employer instigated

67
Q

How long must a trustee must be informed that member has taken independent advice for transfer

A

Within 1 month of member making written request for a statement of entitlement

68
Q

How long must a trustee must be informed that member has received a guarantee date

A

Within 3 month of member making written request for a statement of entitlement

69
Q

What is the deadline for a statement of entitlement to provided to member by trustee

A

Within 10 days of guarantee date

70
Q

When should the member have submitted application to proceed with transfer

A

Witihn 3 months of guarantee date

71
Q

When should the independent adviser have written confirmation about advice given to member

A

Within 3 months of the day of which statement of entitlement given to member

72
Q

When should the transfer of benefits be carried out

A

Within six months of guarantee date

73
Q

What must a firm must do before making a personal reccomendation in transferring benefits

A

Determine proposed arrangements with flexible benefits
Carry out Appropriate pension transfer analysis (APTA) and produce Transfer value comparator (TVC)

74
Q

What is APTA

A

Appropriate Pension transfer analysis - an advisor can assess the meritsof ceding sheme compared to mertis of receiving scheme

75
Q

What is TVC

A

Transfer value comparator - compares transfer value offered by ceding arrangements with estimated value needed today to buy future income benefits under ceding arrangements using lifetime annuity

76
Q

What do Transfer value analysis use to calculate critical yield

A

Annuity interest rates
Revaluation rates
indexation/escalation rates
Mortality

77
Q

Can advisors charge on a contingent basis of a transfer out of DB scheme

A

NO

78
Q

What are some conditions that FCA have done to ensure clients who cannot pay get a service

A

Carve out:
If they can provide that they will die before 75
Serious financial difficulties

79
Q

What is abridged service

A

Limited advice than full advice
- they can provide client with recommendation not to transfer out of scheme
- they must not undertake APTA, provide TVC or consider possible receiving scheme

80
Q

What must firms send out to a client before advising potential transfer out of DB scheme

A

Personalised charges to client

81
Q

How many pages should a suitability report be;
what should it include

A

1 page
charges disclousre
advisor reccomendation
risk

82
Q

What are some main features of public sector schemes

3

A

Pensions fully protected by inflation
Treatment on early retirement superior than private sector scheme
Belong to transfer club - they can transfer without loss to another public service scheme
Added years will be created in receiving scheme so no loss of value on transfer

83
Q

What are the seven public sector schemes

7

A

Local government pension scheme
NHS pension scheme
Teachers pension scheme
Armed forces pension scheme
Civil service pension scheme
Police pension scheme
Fire-fighters pension scheme

84
Q

Where are teacher pension scheme and NHS pension scheme contributions invested into

A

Government securities

85
Q

What are public service schemes now?

A

Care basis - career average revalued earning basis

R04 - Pensions (10 decks)

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