Chapter 5 Rerun Flashcards
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.
Employers contribution - costs depend on what (5) - renumeration, returns, annuity rates, early leavers, profile
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)
Stat GMP escalation reaching SPA pre and post 04/16 for DB in payment
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
Stat escalations in payment SPA post 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%
How does PCLS reduce pension (formula) - £24k pension, 20 years, PCLS 3/80 and 12:1
Can do pension tax manual and residual pen
PCLS reduced pension by - years of servicePCLS accrualfinal salary = Y/factor = X. Current pension- X = new pension amount
Ill health - commutation only applies to… pre and post 75 (LTA and tax)
Commutation of DB for ill health 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.
Death in service;
- Lump sum death ben - when paid and who to, 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
Lump sum death benefit - scheme outlines who can receive. 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.
Funding deficit - how to reduce deficit - contributions, accrual, investing, transfer, age and scheme type
Consutl employees and their reps when - accrual/scheme, DC, conts and future bens
- increase member and employer contributions
- reducing or stopping future benefit accrual (no immediate effect on reducing deficit but can make recovery plan more affordable
- revising investment strategy
- transfer existing company assets into scheme
- extend scheme pension age
- change from final salary to career average earnings for future accrual
Must consult employees and their reps when;
- closing scheme or stopping accrual
- replcaing with DC scheme
- increasing member conts
- changing how future bens are built up
Trustees Responsibilities - DC scheme trustee responsibilities (5) - best interests, deed, powers, scheme and knowledge + inform
specific responsibilities (6) - accounts or face…, advice, draw up, delays, statement and plan
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 of more than 30 days 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
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
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
Preserved Pension - Not contracted out pre 04/16 - what do stat rates of revaluation depend on (2) and rules (for each date range 3)
PP - revaluation of preserved pen when not contracted out (4 date ranges)
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
RPI used until 2011
Pre 01/86 - no revaluation
01/86-12/90 - max 5% CPI for bens post 01/85
01/91 - 05/09 - 5% CPI
post 04/09 2.5%
CETV assumptions - lower annuity rate or discount factor leads to what whilst lower revaluation leads to what
Lower annuity rate or discount factor = higher the transfer value and vice versa.
Lower the revaluation factor, lower the transfer value.
Pension transfer rules - 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
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 legitimat
Public sector schemes - features (3) - inflation, early and transfer club
Financing - local government pension scheme funding and how others are funded (2)
Bens provided - typical accrual rate + PCLS, moved to what and how it works - accrual, revalued when, pip increased in line with, design, SPA
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
