Pensions client update: budget reforms – what changes do trustees need to be considering

At the Budget in March, the Chancellor announced major changes to the way in which pension benefits could be taken. Although the changes relate mainly to defined contribution (DC) benefits, the trustees of defined benefit (DB) and DC schemes need to consider how the changes affect their Scheme.

In this update, we look at the changes Trustees might need to make to their scheme rules and the scheme literature they will need to review.

DB schemes

Trustees of DB schemes will need to consider whether to:

• amend the trivial commutation rule to reflect the increased limit of £30,000 and the reduction of the age at which this option can be taken
• amend the small lump sum rule to reflect the increased limit of £10,000 and the reduction of the age at which this option can be taken
• introduce a small lump sum rule if the scheme does not have one
• amend the dependants’ trivial commutation rule to reflect the increased limit of £30,000
• amend the provisions relating to transfer out to help members who want to transfer all or part of their DB benefits, or their DC AVCs, in order to take advantage of the new flexibilities in DC schemes
• amend for the increase in the normal minimum pension age to 57 in 2028, for example by cross-referring to the statutory definition

Trustees will also need to consider:

• the new legal requirement to ensure that DB members take independent financial advice before transferring their benefits to a DC scheme
• their powers and duties in relation to transfer values, given that more members may request transfers out in order to take advantage of the new flexibilities available in DC schemes
• whether procedures are required to monitor transfer requests, so that any impact that an increase in transfer requests has on the scheme funding position can be efficiently handled
• communications with members who are approaching retirement or who have already retired.

Amending the scheme rules raises a number of questions. These include the need for employer (or other) consent, the members to whom the changes will apply and, in the case of the transfer out rule, interaction with legislation governing transfers. Consideration will also need to be given to whether amendments are consequently needed to other rules, for example, the rules relating to retirement, leaving service or ‘scheme pays’, or winding-up. Trustees should take legal advice before amending the scheme rules.

Communications also need to be approached with care, particularly if there is a proposal to point members to the right to transfer out or encourage them to commute their pension for cash. Again, Trustees should consider taking legal advice where appropriate.

We are expecting a consultation shortly from the government on allowing full or partial withdrawals direct from a DB scheme without first requiring a transfer to a DC scheme. This may affect trustee considerations on dealing with transfers.

Trustees of DB schemes that also offer DC AVCs will need to consider whether the scheme will offer any of the new flexibilities being made available for DC benefits to holders of AVCs. It is most likely that in this situation the full new flexibilities will not be offered, but it will be useful for members to ensure that they can transfer their AVCs to another DC scheme that does offer the flexibilities if they wish. This may require a rule amendment to ensure that partial transfers are possible.

DC schemes

Trustees of DC schemes will need to consider:

• amending their trivial commutation and small lump sum rules to reflect the removal of, and changes to these options
• introducing a small lump sum rule if the scheme does not have one
• amending the dependants’ trivial commutation rule to reflect the increased limit of £30,000
• amending the transfer out rule to allow members to transfer out up to their Normal Retirement Date (rather than up to one year before)
• which of the new retirement options they wish to offer in the scheme from April 2015 (an ‘uncrystallised funds pension lump sum’ (essentially cash), flexi-access drawdown, or neither?), and how to introduce any options that they do wish to offer
• amending for the increase in the minimum pension to 57 in 2028
• whether amendments are needed to other scheme rules, for example, the rules relating to retirement, ‘scheme pays’ or winding-up

The Taxation of Pensions Bill contains a permissive override which will allow trustees of a DC scheme to make payments involving the flexibilities under the new regime (which would be authorised payments under the tax legislation) even if their scheme rules do not allow such payments. In some circumstances trustees may therefore rely on that override; however in the majority of situations it will be preferable to amend the scheme rules to provide certainty.

Trustees will also need to consider:

• how and when to communicate with members about any changes being made to their scheme and retirement options
• how to comply with the new requirement to signpost the ‘guidance guarantee’ for members approaching retirement
• processes to comply with the requirements to provide information to members when pension rights are first flexibly accessed, if the scheme is going to allow flexible access
• what other support to provide to members
• when pre-retirement communication should start
• the need to review member booklets, pre-retirement communications and other scheme literature
• whether advice from the scheme’s investment adviser means that changes are needed to the statement of investment principles (SIP)

In a trust-based scheme, the sponsoring employer will usually need to meet any additional costs resulting from offering new retirement options. Therefore, trustees should discuss the changes with their employer(s) before taking decisions. Amending the scheme rules and the other points listed above also involve a number of legal considerations, which will need to be taken into account. Trustees should take legal advice before making such amendments, and consider taking legal advice in relation to communications with members and changes to their statement of investment principles.

How can Osborne Clarke help?

We have been following the Budget changes closely. We are preparing a checklist that sets out the points trustees should be considering; please contact Jennifer Cave or your usual OC contact for further advice on the steps to take to ensure your scheme is fully prepared for the changes.