What are the options for early leavers?
- Preserved Pension: must be offered once Member has 2 years service.
- Cash equivalent transfer value: must be offered once employee has been a member of the scheme for 3 months.
- Early Retirement: If min pension age reached or ill health retirement.
- Short service refund: If less than 2 years qualifying service and scheme rules allow this option (taxed at 20% on first £20k with balance at 50%,
State the HMRC Mac PCLS Formula.
Max PCLS = P x C / 1 + ( 0.15 x C)
Where: -
P = Pre commutation factor C = Commutation factor
Outline the main features of a bridging pension.
- Addition to main pension paid to member who draws benefits before SPA.
- Stops at point member reaches SPA.
- Either offered as an enhancement to member’s pension benefits or at a cost to the member via a reduction in their post SPA benefits.
What security do members of a defined benefit scheme have?
- The Employer Covenant - the employers’ legal obligation and financial ability to support the scheme now and in the future. If strong trustees less likely to reduce CETV if scheme underfunded.
- PPF - established to pay compensation to members of eligible DB schemes when there’s a Qualifying Insolvency Event in relation to the employer and where there are insufficient assets in the fund to cover the PPF compensation levels.
Outline what a recovery plan should take into account.
IMAP VI
- The value, terms and enforceability of any contingent 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 on sustainable growth.
- Assumptions for inflation/RPI/CPI and the impact if the assumptions used are not borne out in practice.
- The anticipated level of the risk based element of the PPF levy during the recovery plan period.
Outline the main levels of compensation from the PPF
After employer suffers an insolvency event.
100% if: -
- Member retired or deferred but past NPA
- Member in receipt of ill health pension
- Member in receipt of survivor’s benefit
90% subject to cap if: -
- Member either retired or deferred and not reached SPA
50% if members PPF entitlement if
- Spousal/Partner benefits and scheme not in payment.
Note cap is enhanced by long service by 3% for each year of service over 20 years to a max of 2 x cap.
Cap reduced if member takes PPF benefits before 65.
Can DB scheme benefits be transferred out once a scheme has entered the PPF assessment period?
Yes, but if and only if: -
- The member requested and accepted a CETV in writing and designated a scheme willing to accept the transfer.
- The trustees reduce the payment to the amount needed to secure the member’s PPF level of benefits.
Under what circumstances can a DB scheme enter the POF?
- The employer suffers a qualifying insolvency event.
- The scheme has no chance of being rescued.
- The scheme’s assets must be insufficient to secure the member benefits in wind up.
- The scheme assets must be no more than those required to pay the PPF level of benefits.
Outline the steps taken by the trustees to calculate a CETV.
- Calculate the preserved pension at the date of leaving the scheme.
- Revalue the preserved pension to the SPA (use the revaluation rates rates quoted in the exam handout if required).
- Calculate an equivalent capital cost of buying the revalued pension at the SPA.
- Discount the cost back to the date of the calculation using a rate based on the likely returns from the scheme’s investments to give an ICE.
- Make any necessary adjustments to the ICE to allow for underfunding or discretionary increases.
Factors affecting the amount of a CETV
- Scheme underfunding
- Employer covenant
- Enhanced transfer value
- Annuity rates
- Life expectancy
- Revaluation / escalation / inflation assumptions
- Discount rate used
- Discretionary increases
Enhanced Transfer Values Key Facts
- Offered by scheme’s to encourage members to transfer.
- Done to help reduce the scheme’s future liabilities and risk.
- Usually offered for a limited period.
- Cost of any enhancement usually covered by employer to ensure security of remaining members isn’t compromised.
Outline the benefits and drawbacks of Pension Increase Exchange (PIE)
Benefits
- Higher initial income
- Higher PCLS
- Higher spouse / dependents pension
- Better if in ill health or plan to spend more in early years of retirement
Drawbacks
- Member may live last break even point
- Higher value tested against LTA
- May affect eligibility for state benefits
- Inflation may be higher than expected
- May push member into a higher tax bracket
- Member may exceed annual allowance (increase in bens x 16)
