5 - Defined Benefit Schemes 16 Flashcards
What are some types of hybrid schemes?
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
What is AVC
Additional voluntary contributions - typically before A day where members of occupational schemes could buy extra benefits
Who often meets the cost of meeting an inhouse AVC
Employer
What are the two ways In-house AVC can be administered
- DC Basis
Member AVC cont invested into DC fund, proceeds used to provide additional income in retirement - 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
What is bridging pension?
Scheme normal pension age is lower than SPA so member normal pension age a higher pension is paid until SPA then lowers.
Definition of pensionable service
Laid out in scheme rules - employee period of membership of scheme, may not start until waiting period has been completed
Definition of pensionable remuneration
Members basic salary at retirement/death, some other rules adds bonus.
Definition of Accrual rate
The rate at which scheme benefits accrue for each year of pensionable service
What is funding rate
Scheme actuary will calculate level of contribution required on regular basis, which must be at least every three years
Cost of providing DB benefits:
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
How is pension in payment taxed
Earned income
Did many members prior to 2016 who had DB schemes have other pensions?
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
When was contracting out abolished
06/04/2016
Statuory escalation of benefits in payment; member reached SPA before 06/04/2016
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%
Statuory escalation of benefits in payment; member reached SPA before 06/04/2016
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%
What is pension increase exchange?
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.
Why is it pension increased exchange popular with defined benefit schemes
Pensions that escalate in payment are expensive
Cost of increase is unkown
Employer does not suffer large one off cost
What are some benefits/drawbacks of Pension increase exchange
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
What are the regulator principles
Clear, fair and not misleading
Open and transparent
Manage conflicts of interest
Trustee consultation
Independent financial advice
What are the seven principles: A code of good practice
No cash incentive
Advice
Communication
Records
Sufficient time
Members who are over aged 80
Roles and responsibilities
What is an incentive exercise?
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
T/F: A scheme that was contracted out before 06/04/2016 can allow for GMP to be exchanged for cash
False
Can PCLS and pensions be calculated separately
Yes for DB schemes
What is commutation factor?
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
What ha[[ems where PCLS and Pension are provided separtely? To hthe pension figure
Pension figure multipled by factor of 20 + PCLS is added to it.
When can commutation of a members pension take place
Any age even after 75 (but for DB schemes the entitlement only applies to benefits that are yet to be crystallised/ drawn)
Is the payment of a serious ill health lump sum a BCE before 75
YES
Is the payment of serious ill health sum taxed before 75
No as long as value of benefits do not exceed member remaining lifetime allowance
Is the payment of serious ill health sum taxed after 75
Yes as receipient income as PAYE
What does the Pension Act 2004 require DB schemes to undertake each year
Actuarial scheme valuation
potentially every 3 years - where scheme trustees obtain actuarial reports in interevening years
What does actuarial scheme valuation do
Details any develpoments that impact on size of scheme liabilities
What is statutory funding objective?
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
What are scheme assets valued at
MV
When should the schedule of contributions must be produced?
Within 15 months of valuation effective date
What is IAS 19
International Accounting Standards 19:
Give direction on accounting treatment of DB assets and liabilities - aims to make pension scheme more transparent
What is a section 143 valuation
When is it used?
When a scheme enters PPF.
Section 143 valuation is theoretical cost of buying out scheme benefit with an insurance company.
How is the valuation for section 143 based?
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.
What is PPF section 179 valuation
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
If ongoing valuation reveals that a scheme is in deficit who is responsible
Trustees who must stend a recovery plan to TPR
What was the changes issued in the government White Paper 2018
Strengethening of Pension Regulator powers
Defined benefit funding code of practice
Consolidation
What is statement of strategy and who must it be signed by
Part of TPR long term objective plan - must be signed by trustee chair
What are the two ways trustees can choose to comply with new rules issued by TPR
Bespoke/fast track approach
What is a consolidator scheme?
A DB scheme which pension scheme liabilities can be transferred
What do trustees of DB schemes have to agree with employers on as aresult of Pension Schemes Act 2021
Funding and investment strategy
+
Written statement of strategy
Can a person with a criminal record be a trustee
Yes as long as they do not have unspent conviction for deception/dishonesty
What are the trustees responsibilities in pension
Obtain auditied accounts
Obligation to report delays in payments of contribution of more than 30 days
Draw up statement of investment principles
What are the trustees powers in pensions
Hold scheme assets
Determine all questions and doubts in connection with scheme
Carry out any transaction in schemes
How many members of a trustee scheme must be member nominated
At least 1/3 of trustees
Unless every member of scheme is trustee
One member
all trustees independent
scheme is small insured scheme
What are trustees formally required to appoint (advisors)
Auditor
Actuary
Fund manager
unless fund is wholly invested in insurance - no need fund manager
Arrangement is earmarked and insured - no need auditor/actuary
What is a Scheme actuary
Provide periodical actuary valuation
prvode advice about funding princples
Investment factors
What are some conditions of a scheme auditor
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
Can a scheme actuary be a trustee
Yes
Who is responsible for registering pension scheme with HMRC - deals with HMRC in general
Scheme Administrator
Who is responsible for tax relief in pensions - relief at source method
Scheme administrator
Who is responsible for tax liability on refund of contributions
Scheme administrator
What is the taxation treatment of refund of employee contributions
First 20k - taxed 20%
Excess taxed 50%
How can you be entitled to a preser ved pension
Rules of scheme permit
They have completed more than two years service
How many ways can GMP be revalued in deferment
3
Revaluation of preserved benefits within a DBa scheme
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
How long do you have to work to get a CETV in DB scheme
3 months
What are the 4 steps involved to calculate CETV
- Calculate the member preserved pension at date of leaving
- Revalue the preserved pension up to scheme normal pension age
- Calculate the capital cost of buying the revalued pension at normal pension age
- Discount this capital cost at retirement to present to provide its current capital value
What are some ways that employers/trustees do to DB schemes to reduce liabilities
Offer enhanced transfer value for a limited period (to reduce cost)
What type of benefits are benefits held in DB schemes
Safeguarded benefits
What are some conditions that must be met for a member to transfer out of DB scheme
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
How much money is required before a member must receive independent advice to transfer out of safeguarded benefits
30k
Who is expected to pay for the advice to transfer out of safeguarded benefits
Member will unless employer instigated
How long must a trustee must be informed that member has taken independent advice for transfer
Within 1 month of member making written request for a statement of entitlement
How long must a trustee must be informed that member has received a guarantee date
Within 3 month of member making written request for a statement of entitlement
What is the deadline for a statement of entitlement to provided to member by trustee
Within 10 days of guarantee date
When should the member have submitted application to proceed with transfer
Witihn 3 months of guarantee date
When should the independent adviser have written confirmation about advice given to member
Within 3 months of the day of which statement of entitlement given to member
When should the transfer of benefits be carried out
Within six months of guarantee date
What must a firm must do before making a personal reccomendation in transferring benefits
Determine proposed arrangements with flexible benefits
Carry out Appropriate pension transfer analysis (APTA) and produce Transfer value comparator (TVC)
What is APTA
Appropriate Pension transfer analysis - an advisor can assess the meritsof ceding sheme compared to mertis of receiving scheme
What is TVC
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
What do Transfer value analysis use to calculate critical yield
Annuity interest rates
Revaluation rates
indexation/escalation rates
Mortality
Can advisors charge on a contingent basis of a transfer out of DB scheme
NO
What are some conditions that FCA have done to ensure clients who cannot pay get a service
Carve out:
If they can provide that they will die before 75
Serious financial difficulties
What is abridged service
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
What must firms send out to a client before advising potential transfer out of DB scheme
Personalised charges to client
How many pages should a suitability report be;
what should it include
1 page
charges disclousre
advisor reccomendation
risk
What are some main features of public sector schemes
3
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
What are the seven public sector schemes
7
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
Where are teacher pension scheme and NHS pension scheme contributions invested into
Government securities
What are public service schemes now?
Care basis - career average revalued earning basis
