Pension Transfers · 2020. 10. 19. · CF30 (Regulated Financial Adviser) status, ... Even in the...

Pension TransfersEssential Study Notes

Essential Study Notes

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Defined & Safeguarded Benefit SchemesDefined & safeguarded benefit schemes are core knowledge for your exam. You will need tobe familiar with the operation of a range of schemes and the factors that need to be takeninto account when advising on potential transfers out of them.

These exams - AF7/PTPA and AwPETR are the ‘’appropriate qualifications’’ – they give youthe qualifications necessary, which when combined with the regulatory status of competentCF30 (Regulated Financial Adviser) status, enables an adviser to apply and demonstratetheir ability to become a competent pension transfer specialist (PTS) and undertakeoccupational pension transfers and opt-outs.

It requires specific specialist and proven knowledge. Even in the principles-basedcompliance and advice world of the FCA, it still holds a special place for advisers and firmswho want to provide this specialist advice.

With the recent pension reforms, including pension freedoms and the regulatory changes, itis even more important to understand what is required and how a CETV is pulled togetherfor those DB members considering their options (including transfer) to access flexiblebenefits.

The Pension Regulator website is a place you should visit for more detailed backgroundreading where there are various guidance notes and which have been made available withinthe library module, in particular the guidance notes on DB to DC transfers.

Topics:DB Occupational Scheme Structures and FundingThe Pension Protection Fund (PPF)Guaranteed Minimum Pension (GMP)CETV Transfer Value CalculationDefined Benefit Pension Transfers



DB Occupational Scheme Structures and FundingA Defined benefit pension scheme makes a promise to its members that it will pay a pensionbenefit in line with an agreed formula (normally based on a combination of service andsalary) and that promise has a cash value at any one point in time; this is called the cashequivalent transfer value (CETV).

The level of pension benefit/CETV depends on a number of factors:

Scheme accrual rate: Private sector defined benefit schemes build up pension benefits at apre-defined accrual rate of pensionable salary for each year of pensionable service.

Pensionable service: The definition of pensionable employment (start and end date).

Pensionable earnings: The definition of pensionable earnings also varies and how that isworked out can vary widely across different schemes, industries and employments.

Normal retirement age: The benefits accrued under the scheme and measured for CETVpurposes, are based on the member retiring at the scheme’s normal retirement age, which isNOT always 65.

Career average schemes: these are schemes where the earnings formula used to calculatebenefits at retirement, is based on career average earnings rather than earnings at or nearerto retirement; much of the public sector are now in or going into CARE schemearrangements.

Integrated schemes: these are schemes where benefits at retirement attempt to integratewith the state pension either partially or wholly. There are many schemes which base theirbenefits on a combined scheme and state pension.

Hybrid schemes: A hybrid scheme is a defined benefit scheme which also incorporates anelement of defined contribution/money purchase.

Cash Balance scheme: Where the member will be provided with money purchase benefitsbut, part or all of the member's pot is promised or guaranteed by the sponsoring employer

Rules and operationA defined benefit scheme will be established subject to a trust and scheme rules, underwhich the trustees hold the scheme’s assets for the benefit of the members.

Normal retirement ageThe scheme will set a normal retirement age at which the members will usually retire, whichthe employer will continue to promise benefits and then stop.

Employment Equality (Age) Regulations 2006 mean that members may now have theright to continue working beyond a scheme’s NRA (since October 2011)

Employer contributionsThe scheme actuary’s job is to calculate at least every three years the level of employercontribution that will be required to fund the scheme’s pension promises to all members.



Member contributionsMost employers will require their members to contribute to the scheme as a condition ofscheme membership. These contributions are usually set as a percentage of theemployee’s salary.

Revaluation ratesOnce a member has left pensionable service and has accrued a preserved pensionentitlement, that entitlement then needs to be increased to ensure that it keeps up withinflation in between the date of leaving and normal retirement date. This is known asrevaluation. The rates of revaluation will be set out in the scheme rules, but are subject tostatutory minimums, which are discussed later.

Revaluation also has a cousin named ‘escalation’. This means that when a defined benefitpension comes into payment, assuming it has not been transferred by then, the pension inpayment also needs to be increased to ensure it keeps in line with inflation. The rate ofescalation is also set out in scheme rules and again, this will be discussed in more detaillater. This is an important distinction – revaluation is prior to retirement and escalation ispost-retirement. Mixing them up is a bad idea!!!

Before we go any further, what exactly is a cash balance scheme, a CARE schemeand a targeted money purchase scheme? What are the differences?

It’s important to be clear on each definition – because it has a serious impact on howthey are treated in the legislation.

A cash balance scheme is a defined benefit pension under the legislation.The promise is not a defined amount of pension at retirement but a defined lump sum.The lump sum promised (at retirement) is (normally) based on a percentage of salary in theyear the service is accrued.

For example, if you paid 10% contributions in the year of accrual, your employer promisesthat they will be worth 20% (of revalued earnings) at retirement (inflation proofing) – and soon for each year. The key is that the employer makes this promise of the defined cashbalance benefit.

The risk is therefore split between the parties. The employer bears the investment andinflation risk (these are covered in greater detail in module 9) in that it is obliged to make upany shortfall which is not covered by investment returns. However, there is no promise madewith regards to what income the promised lump sum will provide in retirement.

A targeted money purchase scheme is very similar to the cash balance scheme, but there isno legal obligation, no right nor any protection against the employer stopping at any time.When a member joins the scheme a target level of benefit is set. The contribution raterequired to provide the targeted benefit is set and at retirement, the value of the member’sdefined contribution assets can be topped up to ensure that the target level of benefits isprovided.

A CARE scheme on the other hand is a form of defined pension benefit.For each year of service a defined level of pension is accrued, based on a proportion of thatyear’s salary (which is inflation proofed up to NRD). At retirement, all the years proportionsare added together to make up the pension.



You can find various examples, but one scheme provides the explanation as:‘’In your CARE scheme your pension is based on your pensionable pay right across yourcareer. The pension you earn each year is based on pensionable pay in that year and isincreased by a set revaluation rate, linked to inflation, for each year up to retirement orleaving. The final pension is calculated by adding together the pension earned in each yearof membership…’'

To illustrate the difference between a final salary and a CARE scheme, let’s consider thefollowing:

Example 3.1.

Gertrude takes up a position with an employer operating a 1/60ths defined benefit scheme.She joins the employer at age 50 on a salary of £36,000. At the end of her third year, shereceives a promotion and a pay rise to £48,000. At the end of her seventh year, she receivesa further promotion to Director level, where she remains until her retirement at the age of 65.

Now, in the event of the scheme being a final salary one, her benefits would be fairlystraightforward to work out. It would simply be the years of service multiplied by the accrualrate, multiplied by the final salary.

15 x 1/60 x £75,000 = £18,750.

A CARE scheme on the other hand poses a much more complex calculation. Let’s assumethe scheme rules link revaluation to CPI and this is constant at 2% throughout the 15 yearperiod.

Year Salary Accrualrate

Accruedpension

Inflation Years indeferment

Benefit atretirement

1 £36,000 1/60 £600 2% 14 £791.692 £36,000 1/60 £600 2% 13 £776.163 £36,000 1/60 £600 2% 12 £760.954 £48,000 1/60 £800 2% 11 £994.705 £48,000 1/60 £800 2% 10 £975.206 £48,000 1/60 £800 2% 9 £956.077 £48,000 1/60 £800 2% 8 £937.338 £75,000 1/60 £1,250 2% 7 £1,435.869 £75,000 1/60 £1,250 2% 6 £1,407.7010 £75,000 1/60 £1,250 2% 5 £1,380.1011 £75,000 1/60 £1,250 2% 4 £1,353.0412 £75,000 1/60 £1,250 2% 3 £1,326.5113 £75,000 1/60 £1,250 2% 2 £1,300.5014 £75,000 1/60 £1,250 2% 1 £1,27515 £75,000 1/60 £1,250 2% 0 £1,250Total £16,920.81

As you can see, by using the CARE method, the pension at retirement works out a couple ofthousand pounds per annum cheaper for the employer.

This is a very simplistic example as, in practice, most employees receive inflationary payincreases on an annual basis. But it illustrates the point.



Both a cash balance and CARE scheme are defined benefit schemes.There is a useful page in the PTM here: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm053000

Contracting Out Using a Defined Benefit Scheme

The majority of defined benefit schemes were contracted out of the State additional pensions(previously the State Earnings Related Pension (SERPS), and the State Second Pension).Of course, schemes may not be contracted out. This totally finished and stopped on 5 April2016.

The decision to contract out was not made by individual members, but rather by theemployer. Contracted out defined benefit schemes were also known as contracted outsalary related schemes (COSRS). The rules for contracting out via defined benefit schemesare best considered in two halves: those that prevailed before April 1997; and those thatapplied from 6 April 1997 onwards:

1. Pre 6 April 1997Contracting out first became possible with the introduction of SERPS in 1978 when the DBscheme offered GMP (guaranteed minimum pension benefits) broadly the same amount ofpension as a scheme member would have earned in SERPS. The GMP must be separatelyidentified, because it has to be treated in certain prescribed ways:

Deferred pensioners: then the GMP must be revalued each year to NRA. This will becovered further on in this chapter in the section relating to early leavers. This is critical forthe exam; you must know these revaluation factors and dates.

Pensions in payment: The GMP element must provide a spouse’s pension of 50% of themember’s pension.

GMPs ceased to accrue after 5 April 1997 and will convert to ordinary scheme benefitswhen they are transferred to money purchase benefits (where there are no longer anydefined contracted-out benefits).

2. Post 6 April 1997

From 6 April 1997 (Pensions Act 1995); GMPs no longer accrued, those earned up to 5 April1997 remain as part of a member’s pension entitlement. The new standard was known asthe Reference Scheme test (RST benefits):

For each year of service after 5 April 1997, the scheme must offer or provide benefitsbroadly equivalent to a pension payable at 65 (or earlier) of at least 1/80th of 90% ofearnings between the lower earnings limit/upper accrual point earnings band;

A 50% survivor’s pension must be offered, payable on death before and after amember’s pension is paid;

Pension increases have to be subject to limited price indexation (LPI) (with a cap of 5%for benefits accrued before April 2005 and 2.5% thereafter). The price inflation measurewithin LPI changed to CPI from April 2011 (it was RPI before that); we cover this in moredetail later.

(There are more details on GMP throughout this module).



DB Occupational Pension Scheme funding

Defined benefit schemes are required by the Pensions Act 2004 to undertake an actuarialvaluation every year with a full triennial review at least every 3 years. The Pensions Act 2004introduced a statutory funding objective, also known as scheme-specific funding, forprivate sector (funded) defined benefit schemes. It defines ‘‘technical provisions’ andrequires that every scheme ‘must have sufficient and appropriate assets to cover itstechnical provisions’ (which are the current accrued scheme liabilities).

If a statutory valuation calculates a scheme deficit, the trustees are required to develop arecovery plan to achieve full funding of the technical provisions. This plan must be submittedto and agreed with TPR (The Pension Regulator)

Employer Covenant

The employer covenant represents the obligation on the sponsoring employer and its abilityto meet its obligations in respect of scheme funding. It is basically the ability of the employerto inject cash into the scheme to meet pension scheme liabilities.

Where a scheme is underfunded, even substantially underfunded, this does not necessarilymean to say that there are concerns over its long-term sustainability. A substantial change inthe scheme’s funding position may occur as a result of changes in actuarial assumptions, forexample a substantial fall in gilt yields as occurred in the aftermath of the credit crunch. Thiswould drive down annuity rates, resulting in an increase in the capitalised value of thescheme liabilities.

Example 3.2.

Let’s consider a scheme with ten members retiring next year on a defined benefit salary of£20,000 apiece.

That’s £200,000 per year in pension payments.

Say annuity rates are 5%. That gives a capital value of £4m. This can be worked out with thecalculation £200,000/ 0.05 (annual pension/ annuity rate).

Now let’s say gilt yields plummet, causing a reduction in annuity rates to 4%.

The same calculation now gives £5m (£200,000/ 0.04).

A fully funded scheme could therefore find itself 20% underfunded, simply through economicfactors.

This does not necessarily indicate that the scheme has, or will develop, funding difficulties.As long as a viable recovery plan is in place which indicates that the underfunding can beresolved within a significant timescale. Hence, if the scheme is backed by a financiallysecure sponsoring employer with a clearly defined responsibility for its upkeep thenunderfunding may not present a problem. Such a scheme would be expected to be perfectlycapable of meeting its liabilities and able to continue to offer full transfer values.



The Pensions Regulator has set out ten key points for consideration when assessing thestrength of an employer covenant:

1. Through which employer(s) can the scheme access value?2. What is the trustees’ assessment of the employer’s current and likely future

profitability and cash flows?3. How do these compare with the likely funding needs of the scheme both now and in

a downside scenario?4. Over what period of time can the employer afford to repay the scheme’s funding

deficit?5. Is the scheme being treated equitably with other stakeholders?6. Could the employer afford to increase deficit repair contributions (DRCs) in the event

of adverse scheme experience, and over what period of time?7. Do the employer’s plans to invest for sustainable growth restrict support for the

scheme? If so, how will the scheme benefit and to what extent are other stakeholdersalso supporting the investment?

8. How much value could the scheme recover in an insolvency of the employer?9. What are the risks to the covenant and how may it change over time? What options

are there to improve security to the scheme?10. What are the potential implications of all this for the scheme’s investment and funding

strategies?

The covenant should be monitored with a level of detail and a frequency which is appropriateto the nature, scale and complexity of the firm’s operations and its circumstances. Atminimum, this should be considered each time a triennial valuation is carried out.



Factors suggesting a less detailedapproach and/or less frequent review(e.g. every three years)

Factors suggesting a more detailedapproach and/ or a more frequent review

The structure of the employer isstraightforward, e.g. the employer is asingle company, which is not part of agroup or has minimal interactions with thegroup.

The covenant is complex, e.g. the employeris part of a large group with a complex legaland operational structure.

The scheme has a low deficit on a prudentbasis in the context of the employer’sprofitability and cash flow.

The scheme is under-funded and willrequire material DRCs and investmentreturns to reach full funding.

The employer is large relative to the size ofthe scheme and generates significant cashflows relative to the funding needs of thescheme.

The employer is small relative to thescheme and generates limited cash flowsrelative to the funding needs of the scheme.

The employer is able to invest insustainable growth while making sufficientcontributions to the scheme.

The employer is planning to invest insustainable growth which will constrain thelevel of funding available to the scheme inthe long term.

There are no significant competing calls onthe employer’s cash flows (e.g. debtrepayments).

There are material calls on the employer’scash flows, for example it has significantdebt repayment obligations which restrictthe affordability of contributions to thescheme.

The operations of the employer have notchanged since the last review wasundertaken (relevant only if the last reviewwas undertaken within the last three years).

The employer has undertaken materialcorporate activities, for exampleacquisitions or restructurings.

The employer operates in a stable sector. The sector in which the employer operatesis subject to significant change.

The investment strategy is lower risk andthere is low reliance on the covenant tosupport downside investment performance.

The investment strategy is higher risk andthe scheme may require materiallyincreased support from the employer in adownside scenario.

The investment strategy is open andtransparent in its discussions with thetrustees and provides, on a timely basis,the information they require to assess andmonitor the covenant.

The employer does not co-operate with thetrustees and instructs them to rely only onpublicly available information.

The Pensions Regulator guidance to trustees

The Pension Regulator provides an extensive range of regulatory guidance covering manyaspects of scheme funding and trustees’ guidance. In terms of basic scheme funding, themain points to note are:

The trustees have the responsibility to meet the statutory funding objective; The valuation forms the basis for the trustees’ decisions about future funding The trustees are responsible for obtaining professional advice (actuarial advice for the

valuation of scheme assets and liabilities).



One of the best papers/guidance notes to read to accompany this module (part 1 and part 2)can be found here: http://www.thepensionsregulator.gov.uk/guidance/db-to-dc-transfers-and-conversions.aspx

Balance sheet Valuations:IAS 19 scheme valuations

The introduction in 2001 of Financial Reporting Standard 17 (FRS 17) had a significantimpact as to how company accounts should show pension scheme costs:

Scheme assets measured at market value. Scheme liabilities measured using an AA corporate bond discount rate. Past service costs are a scheme liability Actuarial gains and losses were to be immediately priced into the technical provisions.

Using bond yields (to price liabilities on the balance sheet) has encouraged finance directorsto push their schemes towards holding higher proportions of fixed interest securities,matching the asset to the liability and minimising annual volatility in liabilities – as shown onthe balance sheet (investors don’t like large swings on balance sheets).

Further FRS updates are due.

Pension Protection Fund Valuations:

Insolvency valuation (s143 valuation)

This insolvency valuation/measurement assumes that the scheme sponsor is insolvent andthe scheme is coming to an end. Under the Pensions Act 2004, the Pension Protection Fund(PPF) must assume responsibility for an eligible defined benefits scheme if:

An insolvency event has occurred (section 120 notice); and There will be insufficient assets in the scheme on wind-up to pay benefits at the PPF

compensation level (See further about PPF benefits).

This valuation is carried out in accordance with guidance issued by the PPF. A section143valuation is the theoretical cost (buy-out) of buying out the scheme’s benefits with aninsurance company (deferred annuities) and are based on the PPF compensation level.

The Pensions Regulator can intervene where a defined benefit pension scheme is unable tomeet their obligations under the statutory funding objective and they can then: modify futureaccrual of benefits; direct how the technical provisions are calculated; direct the period andthe detail of the recovery plan; and impose a schedule of contributions. They can effectivelydirect the trustees.

This is different from s179 PPF valuation – the s179 is the ongoing valuation at the PPFlevel.



Scheme deficit reduction

However, there are a variety of options open to trustees and employers who face pensionscheme deficits, before or during any recovery plan. These include:

Increasing member and/or employer contributions; The accrual of future benefits can be reduced or stopped completely;

- The scheme can switch from a final salary to a CARE approach;- The accrual rate can be reduced;- Revaluation/escalation rates can be reduced (though not below statutory

minimums);- The scheme’s NRA can be increased;- The scheme can be closed to new members;- The scheme can be closed for all future accrual

Investment strategy can be revised to take a more adventurous approach if employerrisk appetite and liability profile permit

This is a popular exam question and you should read-up on all the options that trusteeshave to reduce the costs of a DB scheme.



Trustees’ Duties

A trustee is someone who is appointed to look after assets held in trust for the benefit ofothers – those others being beneficiaries, or pension scheme members. The basic principlesof pension trusteeship are no different from any other trust.

In the UK, the overwhelming majority of pension schemes in the private sector areestablished under trust and are therefore subject to trust law.

The trustees appointed under the trust deed are required to act in accordance with the trustdeed and rules and overriding legislation governing pension schemes, with the trusteesacting in the best interests of the members.

In the public sector, pension schemes are established mainly by parliamentary statute andare subject to their scheme rules and overriding legislation, but some are established undertrust and thus subject to trust law and are required to act in accordance with the trust deedand rules (where appropriate, overriding legislation).

Trustees focus on what's best for the trust beneficiaries – the scheme members.

That said, on occasion there could be competing interests to deal with: Pensions Regulatorhas published guidance on its website to help pension trustees identify and manage conflictsof interest.

Pension scheme trustees can be individuals or companies. The employer sponsoring thepension scheme will normally decide on the trustee structure and appoint the trustees.

However, by law, the scheme members must normally be given the opportunity to nominateat least one third of the trustees (or directors, where a company acts as the trustee).

Pension scheme trustees are there to make sure the right benefits are paid to the rightmembers at the right time. As well as making sure that the scheme members get theirretirement benefits on time, the trustees also have to handle more difficult decisions, such asexercising discretion on distribution of benefits to member beneficiaries.

Pension scheme trustees have always been expected to have enough knowledge to enablethem to fulfil their duties.

But since 6 April 2006, it's been a legal requirement for the trustees of occupational pensionschemes to have a certain level of expertise in pension matters. In particular, they areexpected to: be "conversant with" their pension scheme's trust deed, rules and othergoverning documents; and have "knowledge and understanding’’ (KAU) of trust law in thecontext of pension schemes.

The Pensions Regulator has produced a code of practice giving trustees practical guidanceon what is expected of them – which is a lot.

There are exemptions for occupational pension schemes with less than 12 members (aSSAS pension trust!!!).



For such occupational pension schemes to be exempt, either all members must be trusteesand the scheme rules must require all trustee decisions to be taken unanimously by thosetrustees who are members; or the scheme must have an independent trustee.

Communications and amending the pension scheme rules.

In recent times, an increasing number of companies are deciding to close their definedbenefit occupational pension scheme to the future accrual of benefits by existing membersand to open up a new defined contribution scheme instead for future service benefits.

The most famous current case is Tata Steel : https://www.ft.com/content/419f3fde-3a3d-11e7-821a-6027b8a20f23

Closing a scheme to future accrual is often not straightforward, and trustees will need to takeinto account a number of considerations before agreeing to an employer proposal.

The Tata Steel case could be a forerunner of future management of DB schemes in trouble.

Trustee considerations

When deciding on whether to agree to an employer's proposal to close the scheme, themain considerations for trustees are:

• ensuring that they act in accordance with their duties as trustees

• the exercise of the scheme's amendment power

• identifying and managing any conflicts of interest

• the implications of closure on the funding of the scheme and its investment strategy

• communication with scheme members

Trustees' duties under trust law

Trustees are usually involved in any proposal by the employer to close its scheme to thefuture accrual of benefits. In many cases, employers do not have an express power to closethe scheme and require the consent of the trustees to use the scheme's amendment power.Even where trustee consent is not required under the scheme rules, employers may stillwish to obtain the trustees' support for the proposal before going ahead.

Trustees should consider carefully any proposal by the employer to close the scheme andensure that agreeing to the proposal is in accordance with their fundamental trustee dutiesunder trust law,

In deciding whether the closure of the scheme is in the best interests of the schemebeneficiaries, trustees should consider the long-term impact of the proposed changes onmembers and their accrued benefits.

Trustees should balance the competing interests of all the scheme's beneficiaries, whetheractive mem-bers, deferred members, pensioners or the sponsoring employer.



Exercising the scheme's amendment power to effect closure

Where there is no express power to close the scheme in the scheme rules, the employer willusually consider whether it can close the scheme by exercising the scheme's amendmentpower.

Where trustees agree to the employer's closure proposal, they should ensure that theamendment power permits an amendment to close the scheme. Under the Pensions Act1995, s 67, there are statutory restrictions on the types of amendment that can be made tooccupational pension schemes, but these do not apply to amendments affecting futureservice benefits.

Negotiations with the employer

Before agreeing to any closure proposal, the trustees should ask the employer:

• to explain and provide evidence of its business case for closing the scheme to futureaccrual of benefits

• to explain the financial and business impact for the employer and its workforce if thechanges are not made

• whether it considered other options for reducing the costs and risks of the scheme fallingshort of full closure (eg reduction of the future accrual rate, change to a career averagestructure, increased employee contributions) and, if so, why it decided to discount them

If the trustees feel that the employer is behaving unreasonably during the course of thenegotiations or have serious concerns about the employer's solvency or covenant towardsthe scheme, as a last resort they should consider approaching the Pensions Regulator.

Communication with scheme members

Trustees have a statutory duty to notify scheme members of material changes to theirbenefits before the changes take effect if practicable, and in any event no later than threemonths after the changes take effect

Where trustees agree to a closure proposal, they should check that the employer has metany applicable statutory requirement to consult its employees before it proceeds with thechange.

Employers are required by statute to consult with members or their representatives for atleast 60 days before making certain changes to occupational or personal pension schemes.

Closing an occupational pension scheme to future accrual of benefits is a change thatrequires consultation, although certain employers are excluded from the obligation toconsult, depending on the number of employees and the type of occupational pensionscheme.



The regime under sections 67–67I of the Pensions Act 1995 (PA 1995) imposes statutoryrestrictions on the types of amendments/modifications that can be made to occupationalpension schemes. In general, the aim of s 67 is to prevent detrimental modifications beingmade to members' accrued (ie past service) benefits without their consent.

Where modifications are caught by the s 67 regime, sponsoring employers and trusteesmust ensure that certain requirements are met before proceeding with the changes (as setout in the PA 1995, ss 67B–67F). Otherwise, the modifications will be voidable at thediscretion of the Pensions Regulator and may lead to fines for the trustees and sponsoringemployer and increased costs for the scheme.

Statutory protection to proposed amendments

Before agreeing to proposed amendments under a scheme’s amendment power, whether anamendment is classed as a protected modification or a detrimental modification to amember’s subsisting rights must also be evaluated.

Section 67 of the Pensions Act 1995 (PA 1995) was intended to allow employers to alterfuture service pension benefits, but also to protect those benefits which members hadalready accrued. At present, the statutory protection is offered via the subsisting rightsprovisions under PA 1995.

Members

The common impact for members, depending on amendments made to future accrual, isthat they choose whether to:

• opt out of the scheme and become deferred members, whereby their deferred pension willbe revalued according to the scheme rules

• remain a member of the amended scheme and have their pension benefits calculated onthe basis of their pensionable service up to the date of the amendment of the scheme butupon their pensionable salary when they either cease employment with the principalemployer or cease to be a member of the amended scheme

The second point is a key one and one which appears regularly when dealing with memberswho are seeking to leave or get a CETV, where the salary for past pension accural is basedon current salary. In the following section, it is worth exploring this one area to provide somecontext on the potential difficulties of changing future accruals for scheme members and howcarefully it needs to be done to ensure it works for members and employers.



Principal employer and the ’Final Salary link’ to DB pension scheme accrual

With the preservation of the final salary link will mean that employers:

• will need to factor the additional funding costs into their proposals and considerwhether there are still financial benefits of opting for the closure of the scheme tofuture accrual

• give early consideration and adherence to the final salary link, so that trusteesand members are more likely to accept the employer’s proposal because of theperceived protection of their benefits

• may be forced to look at other ways of implementing their proposals. Thisapproach was used in South West Trains v Wightman where under a collectivebargaining agreement, approved by employees in a ballot, basic salary (whichalone was pensionable under the scheme rules ) was increased by consolidatingallowances, but it was also agreed that not all the new basic salary would bepensionable in the future.

The key question is whether under the statutory definition of pensionable service, a membercan be described as in service that qualifies him for any benefits.

On the other hand, trustees may consider that the service prior to closure has alreadyqualified the member for the pension benefits, but that the actual calculation of the benefitswhich have already been accrued depends on a factor to be determined in the future,namely the member’s final pensionable salary when leaving service. If not, can a member besaid to be in service qualifying him for benefits if in fact his benefits decrease due to a fall insalary over the period between closure and retirement?

The term 'active member' is defined in PA 1995, s 124(1) as meaning a person who is inpensionable service under the occupational pension scheme.

Given this definition and the fact that certain categories of members will remain entitled totheir pension benefits based upon their future final salary, it could be argued that suchmembers remain in pensionable service and are thus active members.

Some believe that the final salary link is only a prospective entitlement relating to benefitswhich have already accrued and so such members should be classed as being deferred.

Some have concluded that, for statutory purposes, schemes which have ceased accrual ofbenefits but retain a link to final salary do not have ‘active members’ and therefore no'persons in the description of employment to which the scheme relates’, because to be in‘pensionable service’ the member must be continuing to accrue additional years ofpensionable service in the scheme.

It remains to be seen what is followed in relation to this issue, It is worth noting that thePensions Regulator’s Glossary defines:

’’an active member as a '... member of an occupational pension scheme who is at presentaccruing benefits under that scheme in respect of current service'’, and

’’a deferred member as a '… member entitled to a deferred pension (sometimes known as'preserved benefits')'’



The roles of actuaries, auditors and administrators

a) The scheme actuary is responsible following instructions from the trustees for: Preparing the periodical actuarial valuation (yearly and triennial) Providing advice about funding principles, calculations of technical provisions, the

schedule of contributions, recovery plans or changes to future benefits Certifying that the calculation of the technical provisions is made in accordance with

the scheme funding regulations and that the schedule of contributions is consistentwith the scheme’s statement of funding objective. If it isn’t they have to inform TPR.

b) The scheme auditor has to be appointed by the trustees.

c) The Finance Act 2004 requires that every pension scheme must have a schemeadministrator. A scheme administrator’s duties would typically include:

Registering the scheme with HMRC Operating tax relief on contributions under the relief at source system Reporting events relating to the scheme and the scheme administrator to HMRC Making returns of information to HMRC Providing information to scheme members, and others in connection with lifetime

allowance limits, annual allowance limits, scheme pays information and other suchmember details.

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