Learning Material Sample

Retirement planning

7. Occupational defined benefit pension schemes

In this chapter we discuss the eligibility, features, benefits, restrictions and variations of defined benefit occupational pension scheme available post A-Day. We also consider requirements in terms of company reconstructions, bulk transfer and termination.

A defined benefit pension scheme also known as a final salary scheme is an occupational pension scheme provided by an employer where the level of benefits that a member receives depends on a number of factors as follows:

Scheme accrual rate

Most private sector defined benefit schemes build up pension benefits at an accrual rate of 1/60th of final pensionable salary for each year of pensionable serv...

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...ch as basic salary plus the average of all fluctuating taxable earnings over the previous 3 years.

Normal retirement age

The benefits accrued under the scheme are based on the member retiring at the scheme’s normal retirement age which would typically be age 65.

Which accrual rate would be more beneficial for a scheme member – 1/60th or 1/80th?

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As well as the ‘normal’ defined benefit scheme described above, there are also a number of variations and hybrids as follows:

Defined cash schemes

These schemes generally limited benefits so that they all fell within the pre A-Day limits on cash. With the advent of pension simplification, no new further accrual can take place on this basis. However, transitional protection allows protection for pre A-Day benefits accumulated on the basis of cash only.

Career average schemes

These are schemes where the earnings formula used to calcul...

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... and in many ways is mirror image of the money purchase underpin route. The scheme member is provided with a defined contribution retirement benefit with a minimum level of pension based on final salary. Each member has their own defined contribution account plus a separate unallocated account to meet the cost of the guarantee where there is sufficient in the member’s account.

These types of scheme are rare now.

Why are defined benefit occupational schemes increasingly moving across to a career average basis?

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A defined benefit scheme will be established subject to a trust, under which the trustees hold the scheme’s property for the benefit of the members of the scheme and in accordance with trust and pensions legislation.

Normal retirement age (NRA)

The scheme will set a normal retirement age at which the members will usually retire, and up to which the employer will pay contributions. Because men and women must be treated equally, most schemes have equalised their retirement ages at 65 rather than 60.

In practice, there is now only a normal minimum pension age from the HMRC viewpoint, although schemes will continue to operate normal retirement ages as part of their basic structure. However, the Employment Equality (Age) Regulations 2006 mean that members may now have the right to continue working beyond a scheme’s normal retirement age. Since October 2011, there has not been a default retirement age of 65.


Whilst the pension benefits at retirement are not based on contributions paid in to the scheme, nonetheless there must be an employer contribution into the scheme in order to cover the costs of providing the defined benefit. The employee (member) may also be required to cont...

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...ontracted-out status changed. Whilst GMPs no longer accrue those earned up to 5 April 1997 remain as part of a member’s overall pension entitlement. The revised standard is known as the Reference Scheme and is a test of scheme quality:

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

A 50% survivor’s pension must be offered, payable on death before and after a member’s pension being 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 measure within LPI changed to CPI from April 2011 (RPI before that);

The test has to be met in respect of at least 90% of eligible members and this has to be confirmed every 3 years by the scheme actuary.

The resulting pension is generally higher than the GMP it replaced but less well protected against inflation.

State how the scheme will award tax relief on members’ contributions?

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The calculation of scheme assets and liabilities

A key aspect of the management of a defined benefit pension scheme is the valuation of the scheme’s assets and liabilities. This is because the overall position will influence:

The employer’s contributions;

Theemployees’ contributions;

The scheme’s investment strategy;

Risk-based contribution levies to the Pension Protection Fund (PPF);

Transfer values;

The employer’s balance sheet.

Defined benefit schemes are required by the Pensions Act 2004 to undertake an actuarial valuation every year. However, this can be extended to every 3 years where the scheme’s trustees obtain actuarial reports in the intervening years.

Ongoing scheme valuations

The Pensions Act 2004 introduced a statutory funding objective, often referred to as scheme-specific funding, for private sector defined benefit schemes. The Act talks in terms of ‘technical provisions’ rather than scheme liabilities and requires that every scheme ‘must have sufficient and appropriate assets to cover its technical provisions’. When valuing the scheme’s assets they must be valued at market value as opposed to using assumed values.

The trustees must draw up a statement of funding principles, which states how the statutory funding principle will be met. A schedule of contributions certified by the scheme actuary specifying the contributions to be paid by the employer and scheme members must also be put in place within 15 months of the valuation’s effective date.

The Pensions Regulator guidance

The legislation and regulations for scheme-specific funding were followed by the issue of comprehensive guidance notes from The...

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...al contributions to be made is half the total due under the plan. The aim is to avoid the plan being a back-end loaded plan where the recovery is largely deferred until near the end of the recovery period.

There is no specific upper limit for the period over which a planned recovery must be completed. However, TPR says that if a recovery plan has a period of more than 10 years this will trigger closer scrutiny and that 10 years should not be treated as a target. Each recovery plan should be based on the scheme’s circumstances.

In a series of announcements in late 2008 and early 2009 in response to the problems facing sponsoring employers in the economic downturn, TPR has indicated that it is prepared to permit an easing of its guidelines in individual cases where the employer is facing severe strain.

Deficit reduction options

There are a variety of options open to trustees and employers who face pension scheme deficits. These include:

Increasing member and employer contributions;

The accrual of future benefits can be reduced or stopped completely. This has no immediate effect on an existing deficit, but by reducing ongoing costs can make the recovery plan more affordable;

Investment strategy can be revised. A change of investment strategy can limit the extent to which the deficit can increase if market conditions are poor. Many schemes are moving away from equities towards bonds for this reason;

Some employers are developing innovative ways to pledge contingent assets to pension schemes which can be drawn upon only if certain events occur e.g. if funding drops below a pre-determined level.

State the premise that both ongoing and IAS19 valuations start from.

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The role of trustees

Trustees’ responsibilities

Pension scheme trustees have the general responsibilities to act within the provisions of the trust and to hold and invest trust assets for the benefit of the trust’s beneficiaries (scheme members) in order to achieve the best possible returns. They must act impartially and maintain the pension scheme in the best interests of its members at all times.

The Pensions Act 1995 and Pensions Act 2004 provided trustees with the following responsibilities:


Must obtain audited accounts (or face criminal penalties);

Must not rely on the advice of an actuary, auditor, investment manager or legal adviser whom they have not appointed themselves;

Must draw up a schedule of contributions showing employer and employee contributions and delivery dates;

Are obliged to report certain delays in delivery time of contributions of more than 30 days to The Pensions Regulator;

Must draw up a statement of investment principles to provide guidance to their investment managers. With effect from July 2000 this statement also needs to include guidance on the trustees’ ethical and voting policies;

Must prepare a statement of funding principles setting out how the statutory funding objective will be achieved;

Must instigate a recovery plan if a valuation shows that the scheme does not meet the statutory funding objective. Trustees need to show how the recovery plan will be achieved and over ...

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...rustees, an employer in relation to the scheme, a trustee or connected with the trustees.

The content and format of the auditor’s statement should include:

An opinion as to whether or not contributions have been made in line with the schedule of contributions or payments schedule and, if not, why not

Where there is no schedule of contributions or payment schedule, a statement as to whether or not contributions have been made in line with the scheme rules or policy contracts and if not, a statement as to why not.

Scheme administrator

The Finance Act 2004 required that every pension scheme must have a scheme administrator. The scheme administrator must be appointed under the rules of the scheme, be resident in the UK or the European Economic Area, and must hold a required declaration that they understand the responsibility of discharging the functions required of an administrator and intend to discharge them at all times.

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, benefits and transfers.

What could happen to a scheme trustee if they fail to obtain audited accounts?

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Pension at normal retirement age

As stated earlier the level of benefits that a member receives at normal retirement age depends on the following factors:

Scheme accrual rate

Pensionable service

Pensionable earnings.

The interaction of these factors will determine the level of pension payable at retirement.

Pension increases

As a pension may be paid for 25 years or more, especially if there is provision for it to continue to a surviving spouse, a scheme’s pension increases policy can therefore be crucial to establishing its quality. At current annuity rates for a man aged 65, a pension that is guaranteed to increase at 3% each year after retirement is worth around 40% more than a pension which does not increase at all.

Guaranteed minimum pension

Despite the diversity, 9 in every 10 scheme members who were contracted out of the State Earnings-Related Pension Scheme (SERPS) all have an extra protection in common. The guaranteed minimum pension (GMP) element of their total pension accru...

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...ired to surrender pension at the rate of £1 a year for each £9 (men) and £11 (women) of cash taken as a lump sum, though many schemes used other factors. From 1989, many schemes used £12 for men and women regardless of age, either because it was an HMRC requirement for their post-89 joining members in calculating maximum benefits or because it simplified matters.

Many schemes reviewed their commutation factors following the A-Day changes, and increases to a 15:1 basis were common, although wide differences between schemes remain. Very few schemes moved to the HMRC 20:1 valuation assumption, if only because of the extra financial burden it would impose.

Where the maximum PCLS of 25% of the value of the pension benefits is taken, the formula is:

PCLS = [20 x pre-commutation pension x C]/[20 + (3 x C)]

where C is the commutation factor used by the scheme.

On what basis do pensions escalate if they are accrued between 6 April 1997 and 5 April 2005?

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Options on leaving service

In this section we explain the rights and options of employees who leave service prior to normal retirement age with accumulated pension rights.

If employees leave their employer’s defined benefit occupational pension scheme prior to retirement, they will usually have the following options:

Retain benefits within the scheme as a “preserved pension”

Transfer benefits to an occupational scheme or group personal pension/stakeholder scheme operated by their present employer. Alternatively transfer benefits to an individual pension or stakeholder plan.

Take early retirement benefits.

Take a refund of personal contributions paid into the pension scheme.

Preserved pensions

An early leaver with 2 or more years of qualifying service must be offered a preserved pension payable at the scheme’s normal retirement age. It is possible for an employer to offer a preserved pension to members where service is less than 2 years. Few do however.

Preserved benefits from a defined benefit scheme will initially be based on the individual’s service and pensionable salary at leaving accumulated in accordance with the scheme’s accrual rate e.g. for a scheme with a 60ths accrual rate, a member with 20 years service at the date of leaving and a pensionable salary at that date of £30,000 would have a preserved benefit of 20/60 x £30,000 = £10,000. Then from the date of leaving to retirement they will be revalued in line with the revaluation requirements in the table below.

The accumulated pension benefits and lump sum at retirement will then be paid in accordance with normal scheme rules for example, being increased in payment and providing a survivor’s pension.

Where a scheme is in surplus all members may potentially bene...

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... set under legislation i.e. 55 (50 prior to 6 April 2010).

The above restrictions also apply to those members who simply decide to retire earlier than the scheme’s normal retirement age.

Refund of contributions for early leavers

The Pensions Act 2004 introduced new rules for the treatment of pension rights under an occupational scheme for employees who leave with at least 3 months’ but less than 2 years’ service. These took effect from 6 April 2006.

Refund of contributions will not be allowed where employees have achieved 2 or more years qualifying service or where the employer always offers vested benefits'. Qualifying service is regarded as pensionable service within the scheme plus any pensionable service transferred in from a former employment. Where the employer offers a preserved pension after 3 months qualifying service (but less than two years), then there is no requirement to offer a refund of contributions.

For the tax years 2010/11 onwards, the tax on employee contributions refunded is as follows:

The first £20,000 of any refund is taxed at 20%;

Any excess is taxed at 50%.

The tax liability falls on the scheme administrator, who will be able to deduct the tax from the member’s refund. Any interest paid on a refund of contributions is taxed as a scheme administration member payment.

Employer contributions would not be refunded to the member and could be:

Used to pay expenses of the contract

Used to offset the employer contributions for other members of the scheme

Used to provide benefit enhancements for other members

Refunded to the employer, less 35% tax.

What options are open to an employee aged under 55 who leaves a defined benefit occupational scheme with one year of pensionable service?

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Ill-health benefits

Subject to certain transitional reliefs, drawing benefits before normal minimum pension age (55) is only possible on grounds of ill-health.

The Finance Act 2004 defines an ‘ill-health condition’ which must be met for this to occur. The condition is that the scheme administrator has received evidence from a registered medical practitioner that the member is (and will continue to be) incapable of carrying on the member’s occupation because of physical or mental impairment, and the member has in fact ceased to carry on the member’s occupation. Although the rule implies a permanent condition, the legislation has evolved so that a scheme can suspend or reduce payment of an ill-health pension if the member regains their health.

If the member has a life expectation of less than one year, it is possible to commute their uncrystallised arrangements for a ‘serious ill-health lump sum’. The lump sum will be paid free of tax unless the member is over age 75 when a 55% tax charge will apply. The member must have some lifetime allowance remaining and each arrangement must be commuted in full. However, not all...

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...draw retirement benefits.

Survivor's pensions are usually calculated as a percentage of the member’s pension in payment (e.g. 50%). For calculation purposes the member’s pension is usually taken as the amount he/she would have received without commuting any of it for a pension commencement lump sum. 

There is no limit on the amount of survivor’s pension that can be drawn if the member dies before their 75 th birthday. If the member dies after age 75 in receipt of a scheme pension, then the survivor’s pension is restricted to 100% of the member’s pension in the year to death, plus 5% of any pension commencement lump sum drawn by the member.

Many schemes allow an allocation option giving retiring members the chance to surrender part of their pensions so as to increase the potential survivor’s pension.

The Finance Act 2004 defines an ‘ill-health condition’ which must be met for a defined benefit occupational scheme pension to become payable in the event of early retirement due to ill health. State the main elements of this condition that must be adhered to.

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Entry ages are lower than they had been in the past. In many cases this age is as low as 18 or 21. Probationary periods have been decreased to 6 months or a year or in some cases abolished completely.

Employers can include any group of employees they wish....

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...l need to be reduced. Those categories of employees who are not currently allowed entry to the scheme will have to be offered a qualifying pension scheme. Plus any eligible jobholder who opts out of the scheme must allowed to join at least once every 3 years.
Few members of defined benefit schemes reach normal retirement age with the maximum benefits allowable, and as such top-up options are available.

In house AVCs

Prior to A-Day all occupational pension schemes had to offer an in house AVC scheme. Whilst that requirement no longer exists many schemes still retain such schemes. Benefits from an in house AVC scheme can either accumulate on a defined contribution basis, added...

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...ined contribution arrangements.

Originally they were designed for scheme members who wished to exercise some flexibility in terms of how and when they were to draw retirement benefits and also kept arrangements separate from the employer and the main scheme.

List the three ways that an in house AVC can be used to allow a member to top up their benefits in the main scheme.


Answer : Purchase course for answer

In this section, we describe the fundamental basis on which pension transfer values are calculated both for defined benefit schemes and the factors which could affect or vary transfer values.

Basics of calculation of transfer value for defined benefit schemes

To explain the basics of how to calculate a member’s transfer value from a defined benefit scheme, we shall work through an example of the 4 step process:

Step1 Calculate the member’s pension preserved at the date of leaving

This will be based upon length of service, pensionable salary and the scheme’s accrual rate. In addition the member may have purchased extra service via AVCs or transferred benefits in from previous employments.

In our example, Bob accumulates on leaving service, a pension of 20/60ths x £33,000 = £11,000 per annum, where pensionable service is 20 years and final pensionable salary is £33,000.

Step 2 Revalue pension benefits from date of leaving up to the scheme’s normal retirement age

As a minimum, this should be in accordance with statutory revaluation which is the lesser of CPI (RPI before April 2011) or 5% (2.5% for post 5 April 2009 accrual).

With Bob’s pension the benefits accrued prior to 6 April 2009 and he has 15 years left to normal retirement age, so benefits will be revalued at 5% compound over 15 years making his estimated retirement pension grow to £22,868 per annum.

Step 3 Calculate the capital cost of purchasing the revalued pension at the scheme’s normal retirement age

This is calculated using reasonable annuity rates in line with economic and market conditions. Rates should take into account other fact...

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...rsquo;s guidance suggests the points trustees should discuss with their actuary. They must also take into account the assumptions used in calculating the “discount rate” for the transferring member’s CETV;

Permitted reductions - the ICE may be reduced to allow for reasonable administration costs. TPR’s guidance does not actually clarify what may be considered “reasonable” costs, although it does state that the costs estimate may be based on past experience. However, the trustees must also offset any ongoing administrative savings that will result if the member transfers out of the scheme. Any such reductions should be shown on the “statement of entitlement” provided to the member. This is a written statement of the amount of cash equivalent at the guarantee date of any benefits which have accrued to or in respect of the member under the scheme rules;

Allowance for scheme under-funding - where the scheme is under-funded, the trustees may offer CETVs which are less than the transfer value calculated on the best estimate basis. However, this may only be done after obtaining an insufficiency report from the scheme actuary. The amended 1996 Regulations permit the trustees to use their discretion to decide whether it is appropriate to use the last relevant GN11 report as an insufficiency report if its assumptions differ from those used in calculating members’ ICEs. However, TPR’s guidance states that trustees should not generally reduce CETVs, even if the scheme is under-funded, if the employer’s covenant is strong and any recovery period is not too long.

Explain what ICE is.


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In this section, we describe the use, application and interpretation of transfer value analysis systems (TVAS).

Objective of the TVAS

The object of the TVAS is to calculate the “critical yield” (using various assumptions) required from an individual pension plan to match the benefits provided by the transferring defined benefit occupational pension scheme at retirement.

The critical yield can be expressed simply as follows:

Transfer value less charges x (1+ i)n = capitalised value of scheme benefits. Where “i” is the critical yield and “n” is the term from date of transfer to retirement.

Assumptions used

Any critical yield calculation will involve assumptions in terms of:

Annuity interest rate

Revaluation rate

Indexation/escalation rate


These assumptions are set by the Financial Conduct Authority (FCA). They are primarily based around the annuity interest rate.

Annuity interest rate

The AIR reflects the real yield to redemption on five-year index-linked gilts. The FCA specifies this rate and currently sets it annually for each tax year. It is based on a margin that may be above or below the relevant real yield.

Revaluation rates

Two main revaluation assumptions are required:

CPI, currently at 2.5%

Average earnings index (AEI) currently set at 4.0%.

Statutory revaluation - for the purposes of calculating the critical yield, actual inflation is used to the date of transfer with an assumption of 2.5% thereafter.

Revaluation in accordance with s.148 orders - the current FCA assumption for the TVAS calculation of critical yield is 4%.

Fixed rate revaluation - the actual rate applicable will depend upon when th...

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... client’s attitude to risk and preferences – not selected merely to achieve the critical yield.

Ill-health, death and retirement benefits

In addition to considering final pension benefits at retirement, the following factors are important in determining whether a client should transfer benefits away from their defined benefit scheme:

Ill health

If the client is in poor health the levels of ill health benefits available from the ceding scheme need to be compared with the receiving arrangement.

Health, medical and other benefits

It is important to check what additional benefits would be available during preservation and lost on transfer such as health and medical arrangements.

Death benefits

Death benefits could come in a number of ways such as an income or lump sum payment to a spouse/civil partner or dependant.

If the scheme is contracted out, the minimum death benefits is a GMP for widows/civil partners, plus Reference Scheme test pension benefits for post April 1997 service. Benefits above this will be subject to scheme rules.

A lump sum death benefit may be payable although this is restricted usually for leavers to a return of member’s contributions with or without interest.

Early and late retirement benefits

Comparisons should be conducted between the benefits available at ages at which the member is considering retiring. Early retirement benefits can be reduced considerably and if the ceding scheme has good early retirement terms with low or no penalties applicable it would be hard to match those benefits with any new receiving arrangement.

Any critical yield calculation will involve which 4 main assumptions?

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In this section we consider the implications of transferring benefits from the UK to overseas pension schemes.

Overseas transfers from the UK to qualifying recognised overseas pension schemes

Those leaving a UK pension scheme to work overseas permanently have the usual options as to what to do with their accumulated pension benefits including leaving them in the UK pension scheme or transferring to a UK individual pension plan. They can also:

Transfer benefits to an occupational scheme in the other country; or

Transfer benefits to an individual pension arrangement in the other country.

The rules for pension transfers from UK registered pension schemes to overseas pension schemes are more straightforward than the old rules in place before 6 April 2006. However, it might be argued that they are less flexible than before.

We have already covered the rules relating to QROPS in chapter 2, but it is still worth noting the following:

As with pension transfers within the UK there are different rules and tax implications depending on whether a pension transfer overseas is a recognised transfer or a non-recognised transfer;

The only recognised transfers to overseas schemes are transfers from UK registered pension schemes to qualifying recognised overseas pensio...

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...er will still count against the individual’s AA as usual.

Conversely, where non-recognised transfers from defined benefit (or cash balance) schemes are involved, none of the transferred benefits will count against the individual’s AA for the pension input period up to the time of transfer.

Lifetime allowance (LTA)

Non-recognised transfers are not BCEs so they have no impact on an individual’s LTA. The transferred benefits will never be tested against the individual’s LTA – not at the point of transfer, or when the benefits come into payment, or when the individual crystallises benefits under other UK registered pension schemes.

Reporting to HMRC

Any non-recognised transfer from a UK recognised pension scheme must always be reported to HMRC by the UK scheme administrator.

For the first 5 years after the plan holder leaves the UK or within 10 years of the transfer, HMRC will be entitled to receive information about any benefits or withdrawals that are taken from funds that originated in the UK. The individual will be subject to the usual unauthorised payment tax charges if the overseas pension scheme makes any payments from the transferred fund that would not have been authorised payments under a UK registered pension scheme.

In this section we consider the implications of transferring benefits to the UK from overseas pension schemes.


The following options are available to an individual transferring accumulated benefits from overseas to UK:

Leave benefits in the overseas pension arrangement;

Transfer benefits to a registered UK occupational scheme;

Transfer benefits to a registered UK individual arrangement.

The new rules for pension transfers to UK registered pension schemes from overseas pension schemes are more straightforward than the old rules in place before 6 April 2006. Pension transfers to UK registered pension schemes are possible, in theory, from almost any overseas pension scheme. These transfers are not recognised transfers...

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...ich the UK has a double taxation agreement (DTA) containing exchange of information and non-discrimination provisions; or

Any other country or territory(including New Zealand) if all of the following conditions are satisfied:

1. At least 70% of the funds must be used to provide a pension income on retirement at, or after, normal minimum pension age; and

2. Retirement benefits cannot be paid earlier than would be allowed under a UK registered pension scheme; and

3. Residents of the country (or territory) can join the scheme.

When are benefits transferred to a UK registered pension scheme from an overseas pension scheme tested against an individual’s lifetime allowance?


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Several defined benefit schemes have been closing in recent years either to new members or simply outright.

The financial risks of defined benefit schemes are largely put on the employer who has to fund any shortfall between required and actual funding levels in order to pay the defined benefits of the scheme. This risk has been heightened in recent years by poor performance in the investment markets (causing scheme asset values to be lower than anticipated) and further regulation such as the funding requirements arising originally from the Pensions Act 1995, Pensions Act 2004 and new powers provided to The Pensions Regulator to ensure schemes are adequately funded to meet their liabilities depending upon their situation.

There are a number of stages involved in the winding up process:

Checking the scheme rules

A termination clause will be found within the scheme’s trust deed and rules giving notice of the situations where a wind up can happen.

Where a scheme is wound up it could be found to be in surplus or in deficit. Typically the scheme rules and trust deed will also advise on how such situations should be dealt with. If they are not specific, then the trustees will usually have discretion as to what action to take.

The trust deed and rules will also detail in what order members’ benefits will be secured. Often the priority order will be given to pensions in payment before distribution of the remaining fund for...

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...ncy valuation nor does it excuse the employer from finding sufficient assets to match scheme liabilities.

Scheme specific funding requirements arising from the Pensions Act 2004 still apply to closed schemes as do FRS17, IAS19 and contributions to the Pension Protection Fund.

Alternatively, a scheme may be closed to new members, but the benefits of existing members continue to accrue.

Bulk transfer

Bulk transfers of scheme assets and liabilities can be made from pension schemes in circumstances other than scheme wind up.

Employers could make the decision that from now on pension provision for certain categories of member should become defined contribution for future service with the option to convert accrued defined benefits to a defined contribution basis if desired.

In other cases a segment of a business could be sold by an employer.

Bulk transfer without consent

Preservation of Benefits Regulations 1991 and the Winding up Regulations 1996 (as amended) allow trustees of defined benefit pension schemes to buy out the accrued benefits for members on winding up without consent using non profit deferred annuities or if permitted under scheme rules insured contracts.

Bulk buy outs by scheme trustees by way of insured or non profit deferred annuity contracts without consent are also allowed under the Preservation of Benefits regulations 1991 in restrictive circumstances when a scheme is not winding up. A number of conditions have to be met.

There are two types of statutory schemes – public sector schemes and public service schemes.

Public sector schemes

Public sector schemes are more similar to private sector arrangements.

They are funded and have their solvency position monitored;

They are governed by trust documentation and are administered by trustees;

In the main they still provide full RPI protection and are also members of the Public Sector Transfer Club.

Public service schemes

Public service schemes are usually established by statute and are designed for employees working in public services such as central and local government, the police, the fire service, the armed forces, the NHS and teachers.

Traditionally these schemes have offered a pension benefit of 1/80 th of final earnings for each year of service plus a not optional cash sum of 3n/80 th of final earnings. However, many schemes in recent times have amended benefits for new joiners. For example, the accrual rate on offer has been changed to 1/60 th with employees giving up part pension benefits for a pension commencement lump sum using an appropriate commutation factor. We have also seen these schemes’ normal pension age increase from its traditional age of 60 to 65. Some have also changed the minimum employee contribution levels (often upwards) depending upon salary band of the member.

These schemes have a number of key differences when compared to private sector schemes:

Pensions to members and surviving dependants are linked fully to the increases of the CPI, (RPI before April 2011)

Superior treatment for those members retiring early especially through ill health;

Operation of a transfer club for early leavers wishing to transfer bene...

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...eached with the trade unions, and based on the recommendations of the Independent Public Service Pensions Commission.

Introducing a fairer basis for calculating public service pensions, based on the average earnings of a member over their career rather than their salary at, or near to, retirement.

Delivering the Government's commitment that those closest to retirement (within ten years) will not see any change in when they can retire, or any decrease in the amount of pension they receive at their normal retirement age.

Asking people to retire later, with pension benefits normally paid at State Pension age (earlier for members of the police, armed forces and firefighters' schemes, where a normal pension age of 60 is proposed). Nobody will be made to work longer, but a fair adjustment will be made to their pension if they choose to retire earlier or later.

Introducing cost controls so that future unforeseen changes in the cost of pensions are shared by members and employers, i.e. an employer cost cap to ensure such schemes remain affordable and sustainable.

Introducing more commonality to the powers and processes across public service pension schemes.

The transfer club

This scheme only really applies to a small band of pension schemes primarily operating in the public sector. In the transfer club a standard actuarial basis is applied to incoming and outgoing transfers when taking place between club members.

The result is that member’s benefits will be very similar to what they would have achieved had they always been in employment with the second employer based on actual past service.


Explain how public service schemes are financed.

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