Since George Osborne first began talking about using pension pots to buy a Lamborghini employers and trustees with defined contribution schemes have been bombarded with information about what the new flexibilities may mean in relation to their pension arrangements. But for employers and trustees with defined benefit (DB) schemes what does this new flexibility mean and do they need to do anything?
Additional Voluntary Contributions (AVCs)
Where a DB scheme has an AVC facility and those AVCs are provided on a money purchase basis, from April 2015 the scheme will be able to allow members to draw those benefits from age 55 totally independently of any DB benefits.
Although there is no requirement to offer this, employers and trustees may want to consider amending their scheme rules to allow:
- the whole of the AVC pot to be taken as a lump sum at any time from age 55 (subject to the payment of tax) whether or not the member retires and receives his DB pension
- a member who has attained age 55 to take cash from his AVC pot on as many occasions as he wishes (subject to the payment of tax)
- the member to use his AVC pot as a draw down income vehicle
If a default lifestyle fund is currently offered to members paying AVCs whereby monies are moved into gilts or bonds in the period before retirement this may need to be reconsidered if the monies are no longer to be used to provide a retirement income or are to be withdrawn over a prolonged period. In addition where a member dies whilst some of his flexible benefits remain these can be paid as a lump sum which will be tax free so long as sufficient life time allowance remains and the member dies before age 75.
Trustees may also want to consider amending their rules to allow AVCs to be transferred to a defined contribution arrangement whilst keeping the DB benefits in the scheme. This may be a simpler option to administer than allowing multiple cash sum or draw down requests.
Trustees should also be aware that money purchase AVCs are subject to the new defined contribution disclosure requirements. This means that trustees must inform a member of his right to obtain the new “Pension Wise” guidance in respect of his AVCs in order to assist him to make decisions about his flexible benefit options. The guidance itself is to be provided by the Pensions Advisory Service and Citizens Advice Bureau.
In addition where a member has taken his AVCs as either a lump sum or draw down new annual allowance provisions will apply, with a member having a future annual allowance of £10,000 for further flexible benefits savings and £30,000 for other tax relieved savings. Trustees will need to advise the member within 31 days of him first accessing his flexible benefit options of his new annual allowance and his duty to advise the administrators of any other pension schemes of which he is an active member.
New Transfer Requirements
Unlike defined contribution arrangements where the right to a cash equivalent transfer value now extends to a member’s retirement date, the right to transfer under a DB scheme continues to apply only until a year before a member’s normal pension age. However additional safeguards are being put in place in relation to the statutory transfer regime. As a result a member who wishes to transfer a DB benefit with a view to acquiring flexible benefits must first take independent financial advice.
Employers and trustees should be considering:
- whether or not their scheme rules allow members to transfer their benefits in circumstances where they do not qualify as a cash equivalent transfer
- whether they wish to amend the scheme rules to give members a right to transfer their DB benefits at any time up to their normal pension age and to discharge the trustees from any future liability for those transferred benefits
- whether or not to give members the option to take a partial transfer of their benefits which would allow them to transfer part of their scheme benefits to a defined contribution arrangement whilst retaining the rest in the DB scheme
- what systems they need to put in place to ensure they are satisfied that the independent financial advice requirements have been met
The Trustees will also need to consider whether they hold sufficient of the scheme funds in cash in the event that they receive an increase in transfer requests from their older scheme members.
Trivial Commutation and Commutation of Small Pension Pots
It is probable that members of DB schemes will contact employers and trustees of their schemes to ask whether the defined contribution flexible options will apply to them too. For those members with small pensions there has always been an option to commute those benefits subject to certain age and minimum value requirements.
In 2014 the minimum value requirements were increased (for all scheme trivial commutation the minimum limit increased from £18,000 to £30,000 and for single scheme small pension pots the minimum limit was increased from £2,000 to £10,000) and from April 2015 the age requirement will be reduced from age 60 to age 55. Where employers and trustees wish to take advantage of the extension of these provisions they should ensure that their scheme rules allow them to commute benefits on the extended basis, amending them if the old restrictions continue to apply. For members with small pensions this is likely to be a simpler way to access their pension as cash rather than requesting a transfer payment.
Employers are warned however that should they wish to consider undertaking a communication exercise to actively encourage members with small benefits to take them as lump sums, this is likely to bring into play the voluntary code of practice on incentive exercises which will require them to provide members with access to appropriate financial advice paid for by the employer.
After April 2015 DB schemes may find that more members are taking transfer payments before or immediately prior to retirement rather than electing to receive a pension from the scheme. Where this is the case, trustees will need to consider with the actuary and employer whether:
- the valuation assumptions remain appropriate
- there is a need to scale back the cash equivalent transfer value calculation method
- the scheme’s investment policy should be reviewed in light of any revised actuarial assumptions and any increased liquidity needed to make the transfer payments
Having considered the approach they wish to take with regard both to any money purchase AVCs (or other defined contribution benefits provided under the scheme) and the scheme’s transfers out provisions it is recommended that the trustees communicate this with scheme members making clear the options (if any) available to members under the DB scheme and update the scheme booklet as required.
If you have any further questions or need any advice please get in touch with any member of the Pensions Team at Irwin Mitchell who will be happy to provide you with further assistance.