Bridging pensions – bridging the gap to an increasing state pension age

Stephen Richards

Several of my trustee and employer clients are currently looking at the effect the changes to state pension age (SPA) will have on the bridging pensions in their pension scheme.

The purpose of a bridging pension is to ‘bridge’ the gap between taking a scheme pension and receiving the state pension. Bridging pensions can operate in a number of ways, but generally they increase the member’s pension from retirement until SPA to account for that fact that the member is not yet in receipt of the state pension. Once the member is in receipt of the state pension the bridge then falls away. There is a broad spectrum of types of bridging pension: some bridging pensions are payable at the option of the member whereas others are built in to the rules; some provide an additional uplift to a member’s pension until SPA whereas others require a member to give up some of their post-SPA pension to fund the pre-SPA bridging pension.

Changes to SPA and its impact

For a long time SPA was age 65 for men and age 60 for women. By November 2018 both men and women will have an SPA of 65, increasing to 66 by 2020 and continuing to rise incrementally thereafter. This change will impact on bridging pensions. How it impacts will depend on the pension scheme rules.

For rules that state that bridging pensions will be paid to SPA, the change to SPA flows through automatically into the rule and the bridging pension will need to be paid to each member’s SPA – whenever that is. The likely effect is that bridging pensions will need to be paid for longer. For schemes which offer a simple top up these changes will therefore add a further funding strain. Where bridging pension rules require a member to give up post SPA pension for a bridging pension there could be a knock on effect on funding or the change could be cost neutral, depending on the structure of the rule.

For rules which state that bridging pensions must be paid to a specific age – for example age 65 – the change to SPA will not flow through automatically into the rules. Paying a bridging pension to SPA where the rule states the pension should cease at age 65 would be a breach of trust. However, stopping the pension at age 65 is not ideal either: the purpose of bridging pensions is to ‘bridge’ the gap between retirement and state pension age. How useful is a bridge that doesn’t reach the other side?

Changing scheme rules

Scheme rules can be changed to amend bridging pension rules. Schemes can use the amendment power in the rules provided it doesn’t restrict the change and provided the change is not prohibited by legislation (notably section 67 of the Pensions Act 1995, which prohibits certain amendments to a member’s statutory rights). For schemes which cannot make the required amendments due to amendment power restrictions or section 67 difficulties, the government has introduced a new power, effective from 1 October 2013, to allow trustees to amend bridging pension rules by resolution rather than the scheme’s amendment power and without causing a breach of section 67.

For schemes where the bridging pension is paid until SPA trustees may modify the scheme by resolution to allow the bridging pension to cease instead at an age between 60 and 65.

For schemes where the bridging pension is paid until a specific age (such as age 65) trustees may modify the scheme by resolution to allow the bridging pension to cease instead at SPA.

Such changes cannot affect a bridging pension already in payment, must be reasonable in consequence of changes to the age at which members reach SPA, and require employer consent.

I expect that many schemes using this power will be amending their bridging pension rule so that the bridge is paid until the member’s own SPA although the employer will be keen to understand any funding implications. For those schemes which pay bridging pensions to SPA amending the scheme to cease the bridging pension before SPA could be an attractive option to employers who don’t wish to fund the extra amount of bridging pension as a result of SPA increases.

Further issues to consider before changing the rule

In addition to the issues highlighted above, any trustee or employer considering amending the bridging pension rule should:

*  make sure the new bridging pension rule meets the requirements set out on the Finance Act for a bridging pension; and

*  ensure that the new rule is not age or sex discriminatory.

 Stephen Richards is an associate at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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