Defined Benefit Schemes Flashcards
What are the forms of DB pension?
Traditional
Career averaged revalued earnings
Hybrid- DB with MP/DC underpin
Hybrid- MP/DC with DB underpin
How does the traditional DB work?
Taken based on final salary and years of service.
Fianl salary can be defined in many ways and different periods.
What are the average accrual rates for traditional DB
1/60th or 1/80th for each year of pensionable service
How does CARE pension work?
The accrual rate of the pensionable earnings in a year locked in and increased with inflation. Leading to an average over the whole service.
How does a hybrid DB with MC/DC underpin work?
Very low accrual rate.
Notional cash fund runs alongside. If cash grows sufficiently, it allows benefits in excess of DB to be secured.
Cash pot can be taken to another scheme
How does hybrid MP/DC with DB underpin work?
Default DC scheme but with promise of at least a certain level of income in retirement.
What ways can additional benefits be applied alongside DB schemes?
Set up a personal pension and not exceed annual allowance (previously not allowed)
Money purchase AVC
Added years
Additional flat rate pension
What is a money purchase AVC
Building a pot of cash alongside a DB
PCLS can be taken from the value of both but completely from the cash pot.
How does added years work?
AVCs paid to top a DB pension up to the maximum years service.
How does additional flat rate pension work?
Similar to additional years but buying a set amount of pension for each year.
What happens if someone takes out benefits before retirement age?
They have an actuarial reduction
What is bridging pension?
Offering a higher pension in the early years until the state pension starts.
What will the scheme rules designate?
Who can join and what basis
Age
Probationary period
Differences between work sectors
Level of contributions expected by member
How often does an actuary check the employer contrubutions
At least every 3 years.
How is a DB pension taxed?
As earned income under PAYE.
What is the guaranteed minium pension?
The minimum amount a scheme would have to pay out if someone was contracted out of the state second pension.
How would increases be paid between 1978 and 1988 tax years?
Full CPI protection handled by the state.
No requirements on non-GMP
How would increases be paid between 1988 and 1997 tax years?
Scheme Pays up to a maximum of 3% CPI
Balance up to CPI paid by the state
No requirements on non GMP
How would increases be paid between 1997 and 2005 tax years?
Whole pension increased with CPI upto a maximum of 5%pa (LPI) paid by the scheme.
How would increases be paid between 2005 onwards tax years?
Whole pension increased with CPI upto a maximum of 2.5%pa (LPI) paid by the scheme.
When is CPI measured from?
30 September of the previous year
How does GMP work for people who reach SPA after april 2016?
Same requirements on schemes
No requirment for the state.
What is pension increase exchange?
Where someone gives up their increase for a larger starting pension?
What is the advantage of pension increase exchange for a scheme?
Avoids unknown future costs
What is the advantage of pension increase exchange for a memeber
Higher initial amount that could be tax-free (where the tax free is set by reference to pension)
Particularly useful if the member thinks they won’t live long less useful for those looking at a long lifespan.
What does the pension regulator look at with PIE incentive schemes?
Information given to memeber
Maintenance of records
Timescales for decisions (at least 3 months)
Ban on cash incentives.
Summarise benefits and drawbacks of PIE
When can a memeber receive a short service refund lump sum?
When leaving service within 2 years
How is a short service refund lump sum taxed?
First £20,000 at 20%
50% for the rest
Also loses the employer contributions
Besides short service refund lump sum, what other options does an employee have to take when leaving service early?
After 2 months, a cash equivalent transfer, which includes employer contributions.
Or
A preserved pension within the scheme subject to scheme rules.
If after 2 years a member leaves service, what are they entitled to?
Preserved benefit within the scheme that is revalued until the member reaches retirement age.
Revaluation depends on whether the pension was contracted out.
And is set by a fixed rate of GMP
How is a pension transfer worked out?
What are the benefits classed as for pension transfers?
Flexible benefits - benefits calculated as a fund. (Mostly money purchase)
Safeguarded benefits - assets that might be valuable (mostly DB)
What are the rules for safeguarded benefits if more than one year before retirement age.
Can be transferred but must seek independent advice unless below £30,000
What is a concern with CETV?
When calculated, the CETV can be revalued depending on the funding of the scheme at the time.
Underfunded schemes could lower the amount expected
Some may offer more.
What could happen with a transfer within one year till retirement age?
Trustees could refuse the transfer.
What qualifications should an advisor have to advise on pension transfers?
AF7, AF3 or G60 and RO2
Must also be independent of the scheme
How much could advice on pension transfers cost?
£1500 to £2500 for a £100,000 transfer.
What might lose a members statutory right yo transfer?
If there is no link to the receiving scheme
How long does a scheme have to notify a memeber to seek advice after receiving a transfer request?
1 month
When must a scheme issue a transfer value?
Within 3 months of receiving the transfer request.
A guarantee date must also be set in this 3 month period.
When must a member receive their statement of entitlement for a CETV
Within 10 days of the guarantee date.
What does a statement of entitlement set out for CETV
The members transfer value and entitlement to benefits under the scheme.
Then used by the member to obtain advice
Howxlong does a memeber have to make their request to transfer?
Within 3 months of the guarantee date.
Must include proof they have received advice. With FCA details.
No proof of what the advice was is necessary.
How long does the scheme have to make a CETV to the new scheme?
Withing 6 months of the guarantee date
Summarise the pension transfer process.
What new system replaced the transfer value analysis system in October 2018
Transfer value comparator
Appropriate pension transfer analysis
What does transfer value comparator do?
Mandatory check for transfers
Looks at potential costs of providing an annuity to replace foregone bebefits at retirement.
(Not based on individuals circumsrance health etc.)
What will the majority of transfer value comparators show?
The cost of providing an annuity to be higher than the future transfer value.
Why are the majority of future transfer values higher than annuity purchase?
Because they are measured against gilts and an annual management charge of 0.40%. Plus, an assumed 4% cost to secure an income.
What does the appropriate transfer analysis do?
Sits alongside transfer value comparator and looks at the memebers’ personal circumstances.
What should be considered if death benefits are a major reason for pension transfer?
Consider insurance instead.
How often is an actuarial reduction applied if a pension is taken early.
By the months.
What different scheme rules might there be for ill health?
Some bring in the pension to accrued level at the time.
Some will pay what the pension would have accrued to had the person kept working. (These are expensive)
Some pick a level between these.
When can benefits be commuted for a serious ill health lump sum
Benefits have not yet come into payment
Memeber has less than 12 months left to live.
Don’t forget lump sum and death benefits allowance.
How are income benefits paid for death in service?
Paid as a percentage of the amount accrued or paid at a flat percentage of the members’ wage regardless of accrual.
Not tested against allowance
Taxed in hands of recipient
How are lump sum benefits paid for death in service?
Paid as a multiple of salary at time of death.
Tax free up to lump sum allowance
Excess paid at recipients marginal rate
How are benefits paid for death in retirement?
Usually paid as an ongoing pension as a fraction of members pension.
This is either the pension they are receiving or would have received if they hadn’t taken money before their death
What are the different valuation methods used for DB schemes?
Ongoing scheme valuation
IAS 19 valuation
Insolvency valuation (section 143 valuaction)
Section 179 valuation
Describe ongoing scheme valuation.
Assumes scheme keeps running and keeps getting funded
Uses technical provison- assets assessed at market value against liabilities.
Statutory funding objective and contributions used to meet requirement.
How often should ongoing scheme valuation be done?
Annually or every 3 years, if an actuarial report is taken on the other years
Describe IAS 19 valuation
Assets and liabilities onto balance sheet and pension cost brought onto profit loss account. (Links fortunes)
Assets valued at market value
Liabilities by AA rated bonds
Describe insovency valuation
Used when in PPF
Looks at scheme postion relative to the cost of buying out the liabilities at the PPF level with an insurance company.
Used to see how much PFF needs to pay to bring scheme to protected levels.
Describe section 179 valuation
Similar to 143 valuation, but lighter touch.
Used to set the level of PPF levy, the scheme must pay relative to the risk it brings.
Better funded, less risk, less fee.
What kind of measures can be put in place to rectify a shortfall to technical provisons?
What are the requirements for consultation when taking measures against technical provision shortfall?
Only required if more than 50 employees
Consultancy persiod usually lasts 60 days
Regualtor can impose a fine up to £50,000 on employers who don’t comply.
What proposals did the government’s white paper address in 2018?
What does the scheme administrator do?
Often, the employer
Registers scheme with HMRC
Ensures compliance with HMRC rules
Responsible for tax relief and providing information to members
Describe the scheme auditor.
Registered as auditor.
Appointed by trustees
Produces reports to specify whether contributions have been paid in accordance with contributions drawn up by the actuary or in line with the scheme rules.
What are the conditions for being a trustee?
Over 18
Sane
Not bankrupt
Not bared by TPR
How long does a trustee have from appointment to attain suitable knowledge for the role?
6 months
What must a trustee do if a contribution is 30 days late?
Report it to the TPR
What are the rules for memeber nominated trustees.
Must acount for 1/3 of all trustees unless
All memebers are trustees
The scheme only has one member
All trustees are independent of the employer
The scheme is a small insured scheme under the definitions.
What percentage of the total population is employed by the NHS?
2%
What is the transfer club?
An easy way of transferring public pensions between each other as though they were always employed in the same service.
What are the advantages of public pensions?
Inflation protection
Early retirement
Transfer club
How can a public pension be transferred out of the transfer club?
How can
How are NHS and teachers’ schemes funded?
With notional contributions being notionally allocated to government securities.
Goverment can reduce the value of transfers if too many people try to transfer benefits out.
What was the historical value of the public sector schemes
1/80th final salary and cash of 3/80th for each year of service.
What have public sector schemes now moved to for valuing?
CARE basis on new memebers and future accrual.
Those within 10 years of the change were protected.
What was one of the main reasons for removal of the lifetime allowance?
To persuade senior NHS staff from leaving.
