Chapter 5 - Defined Benefit Schemes Flashcards
Hybrids and other scheme variations - what is it
DB scheme with DC underpin - provides bens that are higher of… (2), transfer value for who and higher of (2) and why is this scheme beneficial for early leavers (2)
DC scheme with DB underpin - what does it offer and how does it operate
Is a DB scheme that also has some characteristics of a DC scheme.
DB scheme with DC underpin provides benefits that are higher of the bens calculated on normal DB basis or bens arising from DC plan. Offers transfer value for early leavers that will be the higher of the fund built up in a DC arrangement and transfer value based on the DB provided by the scheme. Basically bens provided will be higher of DB or DC arrangement. This type of scheme beneficial for those leaving the scheme before NRA because;
- DC account which will still grow in line with underlying investments may produce better pension at retirement than a DB pension.
- if transfer value taken it is larger of DC amount or CETV.
DC scheme with DB underpin - offers DC bens with minimum level of pension related to their final salary. Operates by having usual DC account plus separate account to meet cost of guarantee when insufficient amount in members account.
Defined Cash schemes - how are bens limited, prior to PCLS provided what and and schemes are now what
Career average schemes - how bens determined, tends to what, cost to employer, DB better for who and CA useful for who, how can earnings be revalued and bens calculation based on and how (3)
Example - Salary of 20k, revalue rate of 2.5% and two years to retirement with 1/56 accrual rate
Defined cash - limited bens so that it fell within pre a day HMRC limits for TFC. Prior to intro of PCLS, schemes provided lump sum of 3/80s of final pay for each member. These schemes are now only 100% cash for transitionally protected pre a day bens.
Career average schemes - formula to determine benefits based on average earnings over members career which tends to reduce bens payable to member and thus costs to employer. DB scheme better for those where salary increases towards end of career but CA scheme may be useful for those who salary reduces (reduction in hours etc).
Earnings can be revalued in line with inflation or assessment of earnings inflation. Career progression ignored due to each year being considered in isolation rather than total pension accrual being based on salary at retirement.
Bens calculated based on pension accrual on a year by year basis;
- member accrues proportion of their salary for each year of pensionable service (e.g. 1/56th)
- for active members, amount accrued each year based on their salary that year.
- each years accrual revalued at retirement in line with scheme rules e.g. inflation or fixed amount each year.
E.g pensionable salary of 20k + increased at fixed rate of 2.5%. Two years to NPA - 20k1/56 = 357.14 accrued pension this year. Then revalued by 357.141.025squared (this changes with how many years left). Then add up other years to get career average amount.
Topping up DB schemes - how can they top up bens (2)
In-house AVCs - who usually meets costs and if not what else can they get (2), benefit accrual first way;
DC basis - invested into what, can take how whole of fund as what, max and benefit of taking all.
Member of DB scheme can top up bens by using AVC offered by employer or via personal or stakeholder pension.
In-house AVCs - employer usually meets costs associated with setting up and administering in house arrangement and at worst can negotiate discounts with provider or increased allocation rates. Benefit accrual can happen in two ways;
- DC basis - AVC conts are invested into DC fund. May be possible to use this whole fund as PCLS at retirement and total amount of PCLS to be taken is still max 25% of total value of bens. If whole of AVC taken the less of DB scheme commuted for PCLS. This means will have higher initial scheme pension from DB and future escalations in payment will be based on higher amount.
Topping up DB pens - In-house AVCs cont…
On an added years basis - what is it, calc’d using what (2), how are contributions invested, charges for conts and assumptions, why are actuaries conservative with assumptions, what/who is added years best for, once reg started, can only take added years when and transfers and if leave AVC
If AVC in DB scheme that may be possible to buy added years of service and this is calculated by scheme actuary based on number assumptions;
- assumed salary increases and growth of underlying fund.
Contributions expressed as a %
AVC contributions are invested along with the main scheme investments and no charges to contributions but costs built in to assumptions of cost for adding year. Actuaries conservative when making assumptions so that cost of providing bens does not exceed the AVC contributions paid in. Added years AVCs best for employees who expect salary to increase quite quickly.
Once regular contributions have started to purchase added years some schemes do not allow them to be stopped while member remains in service unless financial hardship.
Can only take when main bens are taken and bens can only be transferred in entirety. If leave AVC conts must stop.
Rules and operations -
Setting up scheme - governed by who, how what for benefit of who, rules and must adhere to what (2)
Normal Pension Age - who sets and employer will…, retirement and ben taking and when can they take bens
Bridging Pension - what is this and permitted under what acts (2)
Eligibility - DB & AE and how does it what, rules (4), if used as qualifying pension scheme
Setting up scheme - DB scheme governed by trust. Under this, trustees hold scheme property for benefit of the members. Must have its own set of rules. Must adhere to Pension Act 1995 & Pensions Act 2004.
Normal Pension Age - scheme sets this and age that employer will contribute until. They do not have to retire to take benefits from the scheme. Eligible to take bens from NPA (55).
Bridging pensions - some pay this when schemes NRA is lower than SPA i.e. higher pension paid until SPA is reached. Permitted under Finance Act 04 & 13.
Eligibility - can offer DB as part of auto-enrol and starts as DC then after period of time asked to join DB. Rules define who can join and common ones are;
- minimum entry age (18 or 21)
- probationary or waiting period before employee can join (usually 1 year)
- differentiation between categories of employee (management, staff etc)
- and different level of Bens offered to each category
Can’t be made compulsory but if used as qualifying pension scheme then EJ’s must be auto-enrolled. Can offer NEJ+EW this membership and all can opt out if they wish
Rules and operations - Accrual of benefits - pensionable service, renumeration and accrual rate (brief description on what they are)
- Contributions - tax relief on what via what (2), how are employers conts paid and tax relief for them
Pensionable service - laid out in scheme rules and usually employees period of membership of the scheme. May not start until waiting period has finished.
Pensionable renumeration - rules lay out definition of salary used when determining bens.
Accrual rate - rules define rate at which benefits accrue for each year of pensionable service
Contributions - Can award tax relief of members conts via net pay or RASM. Employers conts are paid gross and deductible as business expense.
Employers contribution - what must contribution meet, costs depend on what (5), when do they contribute and what is funding rate.
Employees contribution - condition of membership and what is their contribution (2)
Employer must contribute and its contribution must meet cost of providing benefits on retirement/death. Open ended commitment for employer as cost depends on number of factors;
- level of final renumeration in future
- investment returns achieved by underlying pension fund
- annuity rates available when member retires unless income comes directly from schemes assets.
- cost of providing guaranteed bens to members who leave scheme before NRA
- profile of membership (age and marital status as this determines period of bens and level of spouse’s bens)
Employer contributes on annual basis. Scheme’s actuary calcs regular contribution level which must be at least every three years - known as funding rate.
Employees contribution - as cost is unknown, condition of membership to pay certain amount towards costs. Employees contribution is;
- % of pensionable salary
- rate that remains constant unlike employers that can vary.
Normal retirement - DB schemes were what pre 04/16 and affected what, what did scheme do to counter this, contracted out between 78-97, when abolished and rights, GMP payment needs to be what?
Member SPA pre 04/16
- Pre 88, accrued 88-97, no accrual, pen for service pre 04/05 and PFS post 04/05.
rate of increase - what determines and stat increases
Pre 04/16 many DB schemes were contracted out and therefore members did not accrue and SERPS or S2P. Instead, scheme provided a minimum level of benefits to replace SP given up.
If contracted out between 04/78-04/97 they built up entitlement to guaranteed minimum pension (GMP) which was same as they would have earned under SERPS. Abolished 04/16 but those in that period will still have rights to GMP. GMP payment needs to escalate in prescribed way;
Member reached SPA pre 04/16
- Pre 88 GMP - scheme does not have to provide any escalation and state is responsible. Will be in line with CPI and paid along with other state pensions.
- GMP accrued 88-97 - scheme responsible for increases in GMP in line with CPI to max of 3% and any additional % is paid by state.
- Non GMP accrual - no requirement for increases
- Pension for service after 04/97 but pre 04/05 - escalate in line with CPI up to max 5%
- Pension service post 04/05 - as above 2.5% max
Rules of scheme determine rate of increase of rest of pension. Stat increases based on RPI then post 2011 CPI.
Normal retirement age - GMP escalation
reached SPA post 04/16 - why is starting amount calc’d, GMP treatment after new SP, when is calc of starting amount done and what does this mean.
Escalations post 04/16 - pre 88, GMP between 88-97 and 3 others.
Reached SPA on or after 04/16 - entitled to new SP and starting amount calculated to ensure not worse off under new rules. Intro of new SP changed how GMP entitlement is treated once start receiving SP. Calc of starting amount done only as at 04/16 meaning no allowance is made to account for CPI increases paid by scheme is respect of post 88 GMP.
Stat escalations in payment as per the above (04/16)
- Pre 88 - does not provide escalation
- GMP between 88-97 - scheme must pay escalations in line with CPI up to max 3%
- Non GMP accrual & pension in service same as other one (5% then 2.5%)
Pension increase exchange - what is it, can only be offered when, why popular with schemes (3), advantages for members (3) and drawbacks for members (4)
This is where member is offered option of giving up future guaranteed increases in pension in return for higher initial pension with no future increases other than statutory. Can only be offered if schemes offer escalations payment. Popular with DB schemes because;
- escalating payments are expensive and increased longevity means costs are rising.
- cost of unknown increases is an unknown liability e.g. life expectancy and inflation and therefore this reduces future liabilities.
- employer does not suffer large one-off cost as only additional cost is higher initial pension which may be worth less than equivalent future pension escalation.
Benefits to member;
- higher initial income whilst healthy and active
- may be entitled to higher PCLS
- if poor health or lower life expectancy get more whilst alive
Drawbacks to members
- if live longer than average then end up worse over long term
- value against LTA test will be higher and LTA issues may occur
- can result in pension input that exceeds AA
- may affect entitlement to means-tested state bens
Pension increase exchange - why is it difficult to assess (3), why does it cause issue for LTA, what is an incentive exercise and what tests must be met (2), 5 principles made why and what are they
Difficult to assess as depends on how long they live and how fast pension expected to increase on average + increases in line with CPI or RPI difficult to predict. Could also cause issue for LTA due to x20 benefits and they potentially have benefits elsewhere.
TRP - an incentive exercise (e.g. PIE) is invitation or inducement provided to entice changing form of their accrued bens which meets both of the following tests;
- providing its used to reduce risk or cost for pension scheme or sponsors
- not usually available to members
These exercises must meet 5 principles in order for TPR to feel member can make informed decision;
- clear, fair and misleading
- open and transparent
- manage conflicts of interest
- involve trustee consultation
- include IFA
Pension increase exchange - IE’s for pensions: a code of practice - what count as IE’s (2), seven principles of this code and what else are treated as IE’s (2)
Voluntary code of practice been produced as well as TPR principles. Pension increase exchange and enhanced transfer value count as IE’s. Seven principles;
- No cash incentives
- Advice - advice should be provided for both and mod should have value compiled and guidance provided to member.
- Communications - should be fair, clear and not misleading
- Record keeping
- Sufficient time - no time pressure
- Over 80 - only offered on opt in basis
- roles and responsibilities - need to act in good faith
This also apply to small pots and TCLS and are these are treated as IE.
PCLS at normal pension age - what determines PCLS, what does some schemes do, usually PCLS provided by and how does PCLS reduce pension
-E.g. work out new pension - Pension of £24k with 20 years service and accrual rate of 1/60th. PCLS 3/80ths and factor of 12:1 and final renumeration of £72k
- if contracted out pre 04/16 what cant be used for PCLS and the effect this has and when may this arise (3)
Rules of scheme determine PCLS (e.g. 3/80ths) and some accrue pension and PCLS separately. More unusual for pension to be commuted to provide PCLS as follows;
- rules of scheme specify commutation factor used to reduce pension e.g. 12/1 = every £12, £1 reduced.
Pension of £24k with 20 years service and accrual rate of 1/60th. PCLS 3/80ths and factor of 12:1 and final renumeration of £72k
- 203/80ths72k = 54K
- 54k/12 = £4,500 = 24k-4,500 = £19.5k new annual amount
Scheme contracted out pre 04/16 cannot allow part of GMP to be exchanged for cash which can restrict lump sum when non-GMP part of pension is small. May arise when;
- low earnings retires from scheme offering pension with rate of 1/80th
- has substantial non pensionable earnings
- retires early on reduced pension
PCLS at NRA - what do they check, if pension and PCLS separate how is max PCLS worked out, why is commuting more complex, Pensions Tax Manual formula***- LEARN THIS
E.g. work out max PCLS & residual pen if can- NPA 65, precomm pen = 30k and salary of 90k. Comm factor 15:1
If pays PCLS in line with what better than what
When bens taken check takes place to ensure not over 25% TFC. If pension and PCLS separate, pension*20+PCLS = notional value and PCLS cannot exceed this.
When commuting, more complicated as residual pension will depend on PCLS taken and comm factor. Complex scenario as not possible to calc residual amount until PCLS is taken and vice versa. Pensions Tax Manual has formula that must be used to calc max PCLS for DB scheme.
- PCLS = (20precomm pensionfactor)/(20+(3xfactor))
Max PCLS = (203015)/(20+(3*15)) = 9m/65 = £138,462
Residual pen = 30k - (max PCLS/15) = £20,769
If scheme pays PCLS bens in line with HMRC rules then will likely get more than those with scheme accrual rates.
Early retirement - can take bens when (2), how are bens accrued an reduced if taking early, what can it lead to and what else reduced
Can take bens before scheme retirement age and at 55 without retiring.
Bens are accrued in usual way up to date of early retirement and then reduced by an early retirement factor e.g. pension reduced by 0.5% for every month between date of retirement and NRA. Can lead to significant reduction e.g. 30% for retiring 5 years early and PCLS also reduced.
Ill-health early retirement - ways to calc pension (3), if <1 year to live can what and how calc’d, lower than what and how is IHLS formulated, pre 75 commutation (3) and when paid post 75 (2)
Rules define how to calc pension on ill-health early retirement and can be one of the following;
- based on service to date of early retirement but without penalty
- based on prospective service to NRA and salary at retirement without pen.
- somewhere between these two.
If less than a year to live can commute whole of pension as lump sum and calc’d using commutation factor selected by scheme admin. Ofter lower than PCLS factor. Usually calc’d by available PCLS+residual pension*comm factor.
Commutation for DB only applies to crystallised bens. Payment of ill-health lump sum pre 75 is BCE and is tax free as long as it does need exceed LTA. Can be paid post 75 if some LTA remaining and taxable at PAYE.
Bens on death - what do schemes rules outline and if expression of wish beneficiary when paid
Death in service;
- Lump sum death ben - when paid, amount payable and what it may be subject to.
- Spouse/depen pension - how much on death and examples of how much paid (3)
- death in service pen based on what, if deferred DISLS paid how and usually entitled to what
Death after retirement - what is usually included and e.g. & how much of pension do they get
Scheme rules outline - DIS Bens and who beneficiary is. If expression of wish nominates someone to receive, they are paid at trustees discretion.
Lump sum death benefit - can pay this on death in service of member. Lump sum payable is unlimited but if member dies pre 75 any lump sum in excess of LTA charged at 55%.
Spouse or dependants pension - Can pay unlimited pension to these on death in service and rules outline amount of pension. For example;
- % of pension based on prospective service til NRA
- % of pension accrued on date of death
- fixed % regardless of service (better if joining scheme late)
Death in service pension usually based on member’s pensionable renumeration at date of death. If deferred, DISLS not usually paid although conts can be returned but usually entitled to % of preserved pension revalued at date of death.
Death after retirement - often guaranteed period e.g. bens paid for at least 10 years and would continue to pay beneficiaries on death. Usually a fixed % of pension at date of death.
Benefits on death - life cover - funding rate assumptions and effect and what employer can use to ensure what received
Calc of DB funding rate uses assumptions about amount of members that die before SNRA and if not right then can be costly to scheme. This can have adverse effect on funding rate at next review and significant if scheme is small. Employer may use separate insured death in service scheme to ensure DIS bens are received but no drain on DB fund.
Funding methods and issues - how actuaries work out funding rate (3) and at each review (3), method of valuing liabilities and approaches used for this
Scheme’s actuaries work out funding rate and works;
- actuary makes assumptions to calc projected scheme bens for each member on retirement, death or exit.
- value of these liabilities compared to value of scheme assets and funding rate calc’d
- funding rate reviewed every 3 years as assumptions may not work out as such.
At each review;
- actuary re-calcs assumed cost of bens at retirement taking into account scheme liabilities since last review
- funds held on review date are schemes assets and reflect investment growth since last review
- difference of the two used to calc funding rate for next period.
No single method of valuing scheme’s liabilities. Different approaches & underlying assumptions used for different purposes.
Funding method and issues - Ongoing scheme valuations - Pension Act 04 requires what and what can they do as long as?
Statutory funding objective - must be set for what, scheme funding must meet what, must set what that details what, product what and what put in place if obj not met.
Schedule on conts specifies what and has to occur when
PA 04 requires DB to undertake actuarial valuations yearly but can extend to three years as long as reports in between.
Statutory funding objective must be set for all private sector DB schemes.
- scheme funding must meet amount of assets needed to cover future liabilities.
- must set statement of funding principles which detail how objective will be met.
- must produce periodic valuations and reports.
- recovery plan must be created if not met objectives
Schedule of contributions must be produced which specifies rates on conts from employer and employee and must occur within 15 months of valuations effective date.
Role of trustees - who must they appoint to do what, who does it include (3), how eligible and who not (3), criminal record and docs they must be familiar with (3)
DB schemes must appoint trustee to oversee trust. Usually included director or senior exec, company secretary and accountant. To be eligible for trustee must be able to hold property, those ineligible are;
- minors or insane
- disqualified under Pensions Act 95 (bankrupt or dis director)
- some prohibited by TPR.
Criminal record not disqualifying unless deception or dishonesty.
Trustees must be familiar with documentation such as;
- schemes trusts and deeds
- statement of investment principles
- statement of funding principles
Trustees must have an understanding pension and trust law and sufficient knowledge of the basics of occupational scheme funding and investment.
Trustees Responsibilities - DC scheme trustee responsibilities (5) and specific responsibilities (6)
Responsibilities for DB scheme trustees;
- hold and invest assets to achieve best financial return consistent with security - powers set out in trust deed & used for ben of bens
- maintain scheme in best interest of members and act impartially
- act within provisions of the deed
- know and understand the scheme, its provisions and financial background
- meet knowledge requirements and inform TPR of notifiable events
Specific responsibilities as well which include;
- obtaining audited accounts or face criminal prosecution
- not relying on advice on anyone they haven’t appointed
- draw up schedule of contributions
- obligation to report delays in payment to TPR
- prepare statement of funding principle which outlines how funding objective will be met with methods and assumptions outlined.
- establishing recovery plan if not meeting funding objective
Trustees powers - what does trust deed set out (3), if not on trust deed what applies.
Member nominated trustees - how much of occ scheme and who nominated for trustee and exceptions (4)
Who must trustees appoint (3) and don’t have to when and legal advice and consequences if not
Trust deed sets out powers to;
- hold the scheme assets and apply them
- determine all questions in relation to scheme
- carry out transaction with connection to the scheme
Where trust deed says nothing on a subject, standard trust law applies.
Member nominated trustees - at least 1/3 of trustees of occ scheme must me a member nominated. Exceptions to this include;
- every member is a trustee
- the scheme only has one member
- sole trustee or all trustees are independent
- small insured scheme
Trustees must appoint actuary, auditor and fund manager. Not necessary to appoint fund manager if wholly invested in insurance policies and the other two when arrangement is insured or earmarked. Must only rely on legal advise given by someone they appoint - removal and fined if not.
Duties of scheme actuary - they will (4) and can give advice on (5)
Scheme auditor - must be what (2) and cant be (5) and auditors statement and contributions (explain action +2)
Scheme actuary will;
- prepare periodic actuarial valuation
- provide advice on funding principles, schedule of conts etc
- certify that calc of technical provisions is made in accordance with funding regulations and schedule of conts is consistent with statement of funding objective.
Can give advice on;
- investment strategy and scheme benefit design
- individual factors (transfer values etc)
- pension cost in employer accounts
- pension aspects of sales and purchases
- provision of statutory actuarial certificates
Auditor - must be appointed by trustees and be a registered auditor. Can’t be a member of the scheme, employee of trustees, employer, trustee or connection to trustees. A auditors statement must include option on whether or not contributions have been paid;
- in accordance with schedule of conts
- if they have not must state reasons why
Scheme administrator responsibilities - (4) and who can they appoint
Duties include;
- registering scheme with HMRC
- operating tax relief o conts under RASM
- reporting events of scheme to HMRC
- providing info to members on LTA, bens and transfers
Can appoint a practitioner to do some of their work.
Refund of employees contributions - when entitled and known as, what can they offer instead, what offered if 3 months in scheme, if awarded how taxed (3) and earmarked
Preserved Pension - when entitled (2), what is short service benefit, how calc’d, if have pp then known as…, why and how revalued, rules in place to ensure what, these rules don’t apply for who
If leave after less than 2 years in scheme they may be entitled to return of personal contributions (known as short service refund). Can offer preserved pension instead. If 3 months in the scheme must be offered CETV on request. If refund awarded, taxed as follows;
- first £20k taxed at 20%
- excess taxed at 50%
- tax liability falls to scheme admin
Contributions are not earmarked (pooled together)
Entitled to preserved pension if rules of scheme permit or completed two or more years of service. If member leaves with at least 2 years service get minimum level of preserved benefit known as short service benefit. Calc’d in usual way (accrual rate etc). Member with preserved pension known as a deferred member.
It is revalued each year to maintain value against inflation and rules of scheme determine how revalued. Stat rules in place to ensure minimum increase. No stat increase for those who left scheme before 01/86.
Preserved Pension - Not contracted out pre 04/16 - what do stat rates depend on (2) and rules (for each date range 3)
Contracted out pre 04/16 - if done up to 04/97 got what? And how is this revalued (3)
Stat rates of revalue in deferment depend on date member left scheme and period of benefit accrual. Rules for these are;
- 01/86-12/90 - bens accrued since 01/85 must be revalued in line with CPI up to max 5%
- 01/91 - 05/09 - all preserved bens revalued in line with CPI up to max 5%
- post 04/09 - all preserved bens revalued in line with CPI max 5% pre 04/09 and 2.5% post 04/09
Rate if average over period of deferral rather than rate individually each year.
GMP - up to 04/97 contracted out accrued pension was GMP. GMP must hold value against rising earnings rather than prices. Can be revalued in deferment in three different ways;
- in line with increases in national average earnings.
- at a fixed rate, this is most common and depends when they left p service
- for leavers pre 04/97 could limit revaluation at 5% and pay DWP a revaluation premium. DWP then make up any difference.
CETV - who have what right to transfer away, 4 steps to CETV calc, why may scheme reduce CETV and if trustees ignore this depends on what and what is CETV calc sensitive to
Those who left on or after 86 have legal right to transfer away. Actuarial calc used to work out CETV;
- Calc preserved pension on date of leaving (may include PCLS)
- Revalue the preserved pension up to SNRA in line with stat requirements (min)
- Calc capital cost of buying the revalued pension at NRA. Done by amount needed to buy annuity.
- Discount the capital cost at retirement to the present to provide current capital value. Discount rate set by actuary and term left to reach NRA used.
Scheme may reduce CETV if underfunded but trustees can ignore this but depends on factors such as ability to increase the level of scheme funding and recovery plan.
Calc of CETV very sensitive to assumptions e.g. lower annuity rate = higher CETV.
Enhanced transfer value exercises - why do they offer these, time period, how is cost covered and why, what rules apply and why they should take financial advice on this (4)
Offering enhanced transfer values to deferred members reduced schemes liabilities along with future risk and volatility of scheme. Offered this for a limited period of time. Cost is provided by employer to ensure remaining members are not compromised.
Regulator’s principles and Code of Good Practice apply to these and cash incentives are not allowed.
Deferred members should take financial advice before making a decision because;
- risk that member may be worse off as employer looks to cut liabilities therefore offer is usually below cost neutrality
- giving up guaranteed bens and taking on risk themselves
- personal circumstances need to be taken into account
- ETV usually offered when schemes have funding deficit
Pension transfer rules - benefit categories (what are they), stat right to transfer rules (5), transferring bens within a year of SNRA (what must be met and stat right), exception to transferring out all Bens and why bens over 30k must seek IFA
Benefit categories within scheme categorised as either;
- Flexible - DC, CB or any ben calculated via fund
- Safeguarded - bens that are neither DC or CB
Have stat right to transfer as long as rules below are met;
- Bens uncrystallised
- ceased accrual in scheme
- applied for and received statement of entitlement
- made app to transfer bens at least a year before SNRA
- all bens are transferred
Can transfer SG bens where member is within a year or SNRA and must met first three points. But no stat right in this case and trustees must agree and usually will as it reduced liabilities.
The exception to transferring out all bens is when SG bens include bens accrued from contracting out (GMP) and contract transferring to cannot accept these bens. Retain right to stat transfer but do not have to do all and leave GMP behind.
Member who has SG bens must get IFA when transferring as conversion for SG bens to flexible bens is regulated activity. (Bens over £30k)
Role of trustees - how often request CETV, steps trustee must follow for transfer (5) and trustee must check (2)
Members with SG have stat right to request CETV once every 12 months. Steps that trustee must follow if member wants to transfer over 30k bens;
- must notify need for IFA within one month
- must issue statement of entitlement within 3 months which includes transfer value at guarantee date.
- Within 10 working days of guarantee date must give SoE
- within 3 months of GD member must confirm transfer wish in writing and give evidence of IFA.
- must then transfer within 6 months of guarantee date.
Trustees must check
- that IFA was given but not responsible for checking advice.
- receiving scheme able to accept TV and legitimate
Advising on pension transfers - what must they undertake (2), before making recs must (3), what need to take into account (5) and pension transfer specialist must (3)
Since 10/18 must undertake Appropriate Pension Transfer Analysis (APTA) and part of this includes use of Transfer Value Comparator (TVC).
Before making personal recommendations, firm must;
- determine where benefits will be moved
- carry out APTA and TVC
- must ensure client understands how outcomes of above influence recommendation
To demonstrate transfer is in clients best interests, should take into account clients;
- intention for assessing benefits
- ATR
- understand of investment risk
- retirement income needs
- alternative ways to achieve clients objectives instead of transfer.
Pension transfer specialist must be used for this and must;
- check entirety and completeness of advice
- confirm personal recommendations are suitable
- confirm in writing they agree with advice.
APTA - what is it, where should findings be included, can include what (2), COBS states to carry this out must (2), FCA requirements (2),
Means by which adviser can assess merits of ceding scheme to receiving scheme and process by which adviser carries out analysis. Findings from this should be included in SR. Can include behavioural and non-financial analysis.
COBS states to carry out APTA firm must
- assess bens likely to be paid and options under ceding scheme
- compare against proposed arrangement.
FCA requirements of APTA;
- prescribed assumptions must be used &more cautious ones where appropriate
- TVC must be prepared which takes into account all charges
Transfer Value Comparator (TVC) - what is it, must use what (2) and depends on what, if >12 months to SNRA TVC must (3), if < it is…
Transfer Value Analysis (TVA) - what is it and what assumptions (4)
TVC compares transfer value offered by ceding scheme with estimated value needed to purchase future income benefits under ceding arrangement to buy lifetime annuity. Must be provided using FCA wording and format and wording depends on whether more or less than 12 months to go til SNRA.
If 12 or more months to SNRA, TVC must;
- revalue future bens by projecting them to SNRA
- determine estimated future cost of lifetime annuity to match above bens
- apply relevant rate of return to future cost to get amount needed at calc date. This amount then compared to transfer value.
If less than 12 months, estimated value needed to purchase the future income bens using lifetime annuity is compared to transfer value.
Calculates annual investment return or critical yield required for pension after charges to match benefits available from DB scheme at retirement. Uses assumptions of;
- annuity rates
- revaluation rates
- indexation/escalation rates
- mortality
APTA - client specific factors (3), comparison between schemes (3) and adviser requirements (3)
Client specific factors;
- impact of transfer on tax position
- impact on state bens
- analysis should plan for going over life expectancy
Comparison between ceding and receiving schemes;
- how they play a role in meeting requirements
- provision of death benefits
- comparison of bens must be undertaken consistently
Adviser requirements;
- consider any trade-offs (e.g. prioritising income needs over death bens)
- consider other assets available or other ways to meet needs
- rates of return must reflect investment they are recommending.
Improving quality of pension transfer advice (5)
- Pension transfer specialist must hold level 4 qualification
- advice must take account of the destination of transfer funds
- ATR take into account
- two advisers may work together but must have same information and robust processes
- Triage service should provide generic balanced info on advantages and disadvantages to pension transfer.
- no longer allowed to contingent charge unless meet carve out
Public sector schemes - who does it include (7), features (3)
Financing - local government pension scheme funding and how others are funded (2)
Bens provided - typical accrual rate + PCLS, moved to what and how does it work (5)
These include
- LGPS, NHS, teachers, armed forces, civil service, police and fire-fighters. Paid for by governmental departments. Features of public sector schemes include;
- pensions in payment are fully inflation protected
- early retirement usually superior
- transfer club which allows transfer to another public sector scheme
LGPS is funded and all others are underfunded;
- absence of fund should not present security problem as underfunded schemes guaranteed by statute and Gov will pay bens
- teachers pension and NHS are notionally funded. Invested in Gov securities rather than fund.
Typically provided 1/80 accrual and 3/80s PCLS. All public sector schemes moved from DB to CARE. Works as follows;
- accrual is based on revalued earnings for each year or pensionable service and have varying rates of accrual.
- Bens are revalued each years and varies from scheme to scheme
- pip increased in line with CPI and leavers increased by CPI from date of leaving.
- single benefit design across all income ranges
- normal pension age increases in line with SPA
Transfer of public sector schemes - have right to…, ministers can reduce what and why, NHS and teachers cannot due what,
The transfer club - rules that apply (3), how are credits calc’d (4)
Have right to transfer their benefits and ministers can reduce CETV where transferred into scheme where flexible bens can be obtained. Do this due if significantly increasing risk or level of payments needed out of public funds to support pension scheme. NHS and teachers cannot transfer into flexible benefits.
Following rules apply for the transfer club;
- member treated as if they had been in new scheme since joining the previous scheme and therefore receive equivalent credits.
- benefits based on salary in new scheme and service in both
- receiving scheme will supplement the transfer to provide bens.
Can transfer across without loss and credits calc’d as follows;
- provides CETV
- receiving scheme uses assumptions and converts CETV into added years in the new scheme
- calc takes into account differences in NPA and structure of scheme
- due to this, added years credited could be different to number of years of pensionable service.
