28 March 2013 - Post by:Mervyn Parry
Are you fully aware of all the pension promises made under your pension scheme? There’s one batch you may have missed – the reinstated pensions after the misselling scandal of the 80s and 90s.
Do you remember the introduction of personal pension schemes in 1988 and the subsequent misselling saga when commission-driven salesman persuaded members of defined benefit pension schemes to transfer to a personal pension scheme? This was followed by the SIB review and in many cases the payment of compensation. Many employers were happy to allow their employees, but not necessarily those who had left the business, to be reinstated in the scheme, effectively offering an amnesty.
At first sight it looks straightforward to put the position right. The personal pension provider will have paid compensation which was received by the pension scheme and the member re-credited with his past pensionable service.
But was any more offered? There might have been a temptation to recognise that the employee had been in a DC personal pension plan, which might still have looked attractive to a member, enhanced with compensation, compared with the reinstated added years, so that some sort of underpin may have been offered as part of the amnesty.
I recently came across such a case where the additional promise took the form of a fixed pension at normal pension age as an alternative to the pension secured with the bought-back years. When the issue came to light at first glance the numbers involved looked extraordinary. The fixed pension guarantee relating to the bought-back service (only a quarter to a third of a working life) amounted to one and half times any annual pensionable salary that the member had ever earned. The fixed pension alternative was around six times the pension calculated on an added years basis. No, the member had not suffered drastic reductions in earnings and there had been no obvious error. In fact the fixed pension had been calculated on the MFR* basis, consistently with transfers out at the time. The member must have thought Christmas, or at least retirement, had come early.
In the old days of Inland Revenue approval no doubt Inland Revenue limits would have limited the maximum pension which could have been paid from the scheme. But what do your rules say in the post-A Day period? Possibly they would have continued Inland Revenue limits but, quite likely also, they would have permitted the full pension to be paid (and it could be well within the lifetime allowance). Even if there were some facility to restrict the benefit arising from the guarantee there could well be difficulties. What information had the member been given in the past? Had transfer value quotations been given previously? Has information been provided to a court for divorce or pension sharing purposes?
Despite the Pension Regulator’s best intentions on data accuracy, information on administrative systems dating back many years may not be fully accurate or up to date. If an amnesty case such as this crosses your desk it is well worth digging into the archaeology of the scheme records to see if there are any other unexpected or perhaps long-forgotten commitments to members – and finding out whether the actuary has been aware of them for valuation purposes.
* Minimum funding requirement: the statutory funding requirement in the 1990s
Mervyn Parry is a consultant at Allen & Overy LLP.