5. Occupational Pensions Flashcards
What is the accounting valuation method of pension funds? (3)
Assets valued at market value (fair value), revalued every 3 years
Discounted against AA corp bonds
Led to lower reported profits & shift of assets from equities to bonds
What are the 2 types of occupational scheme funding?
Funded in advance; benefits paid from contributions
Unfunded/PAYG; benefits paid from other funds
What are the pre-2006 DB scheme rules? (6)
Pension could not exceed 2/3 final remuneration
Ers conts unlimited
Member conts capped at 15% earnings
Could apply default retirement age with penalty for early
Tax-free lump sum at retirement = 150% final remuneration
Final salary defined as either:
- total pay in yr of retirement
- avg last 3yrs ending 10yrs before retirement ie -12 to -10
What were the typical features of pre-2006 DB schemes? (4)
Min membership age 18-21
Probationary period up to 1yr
Could define employee categories with their own benefits
Membership couldn’t be compulsory but everyone auto-enrolled
What were the pre-1997 rules on contracted-out DB schemes? (4)
Final pension had to be at least equal to Guaranteed Minimum Pension (same level as SERPS/S2P)
Once in payment, benefits increase by RPI, capped at 3% (CPI from 2011). State pays excess of 3%
Had to provide spouse pension upon member death @ 50% GMP
What were the 1997-2016 benchmark rules on contracted-out DB schemes (5)
Lifetime pension starting 65yo
Pension at least 1/80 qualifying earnings (90% band earnings) per yr of service, max 40yrs
Spouse death in service/retirement pension of 50% accrued/actual
Pensions in payment increase by:
- pre Apr05; RPI capped 5%
- post Apr05; CPI capped 2.5%
Scheme passes if above are met for 90% members
Death in service benefits:
Lump sum & dependent’s pension
pre-06 limits
post-06 typical
Lump sum:
pre-06; limited to 4x pay
post-06; unlimited, typically 2-4x
Dependent’s pension:
pre-06; limited to 2/3 member’s pension for spouse and 1/3 per child, total capped at 100%
post-06; unlimited, typically 50-66%
Key features of employer-sponsored AVCs (6)
Scheme may require 12m notice to start AVCs
AVCs can be irregular timing & amount
Net pay arrangement; IT relief
Could be offered as add’l yrs service
Benefits can be taken independently from main scheme
Limited investment choice
What are the 3 types of public sector schemes & example?
All DB:
Unfunded; benefits paid from tax revenues eg civil service
Notionally funded; conts paid to Treasury and notionally invested in gilts, but state pays benefits eg teachers, NHS
Funded; conts invested, benefits paid from scheme eg local gov
Key features public sector schemes (3)
Moving from final salary to career average
NRD moves up in line with SPA
- workers within 10yrs of NRD @ 2012 not affected
Transfer club; yrs service retained if transfer within public sector
Describe executive pension plan and small self-administered schemes
EPP; for small companies, one person per scheme
SSAS; max 11 members, all are trustees. Typically set up to purchase co’s commercial premises
What are the rules for SSAS (8)
- lending/borrowing
- commercial
- resi
- shares
Can borrow up to 50% fund net assets
Can lend up to 50% net assets to employer
- 1st charge on co’s assets
- charge interest @ at least base rate +1%
- interest & capital repaid equal instalments
- max term 5yr, rolled into new 5yr only once
Charge for res prop; 40% member, 15% scheme
Can invest max 5% fund in co’s shares
Key features group personal pension (4)
Arranged by employer
Each Ee has own policy
Er conts offered via payroll
Simple & low cost for Er
Employer exemptions from stakeholder pensions? (3)
Ers exempt if:
- had <5 Ees
- offered occupational scheme to all members
- offered 3%+ conts to Ee personal pension
Cannot charge penalties on Ees
Effectively replaced by auto enrolment in 2012
What is the DB pension accrual rate for public sector workers? (2)
1/80th final/avg salary for each yr service
Plus 3/80ths tax-free lump sum
