Features and Security of Defined Benefit Schemes

Question 1

Early Leaver Options

Answer 1

Preserved Pension must be offered once employee has 2 years scheme membership

CETV must be offered once employee has been a member of the scheme for 3 months

Early Retirement if minimum pension age reached or satisfies ill health rules

Short Service Refund if less than 2 years qualifying service and the scheme rules offer this option

Question 2

Early Leaver Ill Health - NEVER BEEN TESTED BEFORE

Answer 2

HMRC rules permit a member to take their benefits at any age when -

The scheme administrator receives qualified medical advice that the member satisfies the ill health condition.

The medical advice confirms that the member is, and will continue to be, medically incapable of continuing their current occupation.

As a result of the ill health, the member has ceased to carry on their occupation.

Could be a medical / ill health / accident etc
Scheme will have its own rules as to what satisfies these conditions.
Could be own or any occupation; or somewhere in the middle.

Question 3

Guaranteed Minimum Pension

Answer 3

The Guaranteed Minimum Pension (GMP) is the minimum pension which a United Kingdom occupational pension scheme has to provide for those employees who were contracted out of the State Earnings-Related Pension Scheme (SERPS) between 6 April 1978 and 5 April 1997. The amount is said to be ‘broadly equivalent’ to the amount the member would have received had they not been contracted out.

Question 4

PCLS Example: £50,000 pa pension

Answer 4

12:1 18:1

HMRC Maximum PCLS

£50,000 x12 £50,000 x 18
_________ = £214,286 __________ = £243,243

1+(0.15 x12) 1+(0.15 x18)

Post commutation Pension

£32,143 pa £36,487 pa

Lifetime Allowance value

£857,146 £972,983

Higher commutation rate = Better Value and less given up to secure PCLS

12 is not very good
18 is very good

Question 5

Bridging Pension (State Pension Deductions)

Answer 5

An additional amount of scheme pension paid to a member who draws their benefits before SPA.

Bridging Pension stops at the point member reaches SPA.

Schemes have different methods of providing ;

• An an enhancement to member benefits
• As a cost to the member via a reduction in their post SPA scheme pension

Question 6

DB Scheme Security

Answer 6

comes in 2 ways -

Employer Covenant

The employers legal obligation and financial ability to support their DB scheme now and in the future

PPF

Established to pay compensation to members of eligible DB schemes, where there is a qualifying insolvency event in relation to the employer and where there are insufficient assets in the pension scheme to cover PPF levels of compensation.

Question 7

Recovery Plans

Answer 7

A recovery plan should take into account -

• The value, terms and enforceability of any continent security provided by the employer
• The likely benefits available should the employer be subject to an insolvency event in the short term
• Whether any changes are expected to the membership profile that could significantly affect funding
• The impact on the employer and sustainable growth
• The impact if the assumptions used are not borne out in practise
• The anticipated level of the risk-based element of the PPF levy during the recovery plan period

Question 8

PPF Compensation

Answer 8

Status when the employer suffered an insolvency event:

100%

• if member is retired/deferred and as reacted schemes NPA
• Member is in receipt of pension on the grounds of ill health
• Member in receipt of a survivors benefit

90%
- Member (retired / deferred) who has not reached scheme NPA

50%
- Spouse/ civil partner / relevant partner not already in receipt of benefits

PPF Cap uplift

3% for each complete year of service over 20 years. i.e. 22 years would get 6% uplift

All based on schemes NPA. This is to prevent members retiring early if scheme is going into PPF.

Question 9

PPF and Transfers

Answer 9

Once a scheme enters the assessment period trustees may only pay a transfer where:

• The member had already requested sonf accepted age transfer in writing and designated to a scheme willing to accept the transfer AND
• The above actions all occur before the scheme entered the assessment period AND
• The trustees reduce the transfer payment to the amount needed to secure the members PPF level of benefits

Once in PPF a member has no right to transfer.