Chapter 5 - Defined Benefit Schemes

Question 1

How could additional voluntary contributions be accrued (2)?

Answer 1

On a defined contribution basis
On an added years basis (buying more years in a DB fund)

Question 2

What two acts must trustees of a DB scheme adhere to?

Answer 2

The Pension Act 1995 and the Pension Act 2004

Question 3

What is a bridging pension?

Answer 3

Where a DB schemes normal retirement age is lower than the state pension age (SPA), the scheme will pay a higher pension until SPA is reached

Question 4

What are the 3 factors DB benefits are based off?

Answer 4

Pensionable service
Pensionable salary
Accrual rate

Question 5

How do the statutory escalation of benefits for a DB scheme increase?

Answer 5

They escalate in line with CPI up to a max of 2.5%, pre 2005 it could escalate up to a max of 5%

Question 6

What is a pension increase exchange?

Answer 6

Where a member is offered reduction in their guaranteed pension for a higher initial pension

Question 7

What does a commutation factor of 12:1 mean for PCLS benefits?

Answer 7

12:1 means for every £12 of PCLS the pension will reduce by £1

Question 8

What is the formula for calculating the max PCLS payable?

Answer 8

PCLS = 20 x pre commutation pension x C/(20 + (3 x C)

Where C = commutation factor

Question 9

When a pension scheme is struggling to meet its liability what are 4 options available to them to reduce their deficit?

Answer 9

Increase member conts
Reducing the accrual rate
Revising the investment strategy
Transferring company assets to the scheme

Question 10

What are 4 activities undertaken by a DB scheme administrator?

Answer 10

Registering the pension scheme with HMRC
Operating tax relief on conts
Returns of information to HMRC
Giving info to members regarding members LTA/transfers

Question 11

If a member leaves a DB scheme less than 2 years after they join, how do the refunds work?

Answer 11

The first £20,000 of any refund taxed at 20%
Excess taxed at 50%

Question 12

What is a member of a DB scheme with a preserved pension known as?

Answer 12

A deferred member or deferred pensioner

Question 13

What is the difference between a preserved pension and a CETV?

Answer 13

A preserved pension provides a guaranteed pension at the schemes pension age, whereas the Cash Equivalent Transfer Value (CETV) is a cash lump sum that is invested into a new pension arrangement

Question 14

What are safeguarded benefits?

Answer 14

These are benefits in a pension scheme that are neither cash nor DC benefits

Question 15

Can flexible benefits be transferred?

Answer 15

Yes, as long as they are Uncrystallised

Question 16

Members with safeguarded benefits have a right to request a CETV how often?

Answer 16

Once a year, though if the CETV is greater than £30,000 they must seek independent advice

Question 17

The calculation for critical yield uses assumptions for (4):

Answer 17

Annuity rates
Revaluation rates
Indexation rates
Mortality

Question 18

What is abridged advice?

Answer 18

Adviser can only recommend the client NOT to transfer out of the scheme

Question 19

What is a “transfer club”?

Answer 19

Where public sector schemes allow members to transfer to other public schemes without loss

Question 20

Scheme X and scheme Y are both occupational pension schemes but only scheme X is covered by The Pension Protection Fund. This is because

Answer 20

Scheme X is a DB scheme and Y is a DC scheme

Question 21

The technical provisions of a defined benefit occupational pension scheme are the

Answer 21

Valuation of the schemes liabilities

Question 22

What is the formula to calculate someone’s residual pension?

Answer 22

Residual pension = Full pension - (PCLS/commutation factor)

Question 23

The trustees of a defined benefit scheme must report a delay in the payment of contributions to The Pensions Regulator once the delay is more than:

Answer 23

30 days

Question 24

DB scheme trustees must issue a schedule of contributions within what time period of the schemes valuation effective date?

Answer 24

Within 15 months of the valuation effective date