We all know what a hot potato defined benefit (DB) schemes are at the moment.
Most of us would rather hide in a darkened room than get involved.
But there are things we can do, and questions to bear in mind, to surface all the information DB schemes don’t hand to us on a plate.
It’s that hidden bit of vital information, when missed, which could have the biggest impact on the client when you’re producing the initial transfer value comparator (TVC) and appropriate pension transfer analysis (Apta).
Given the TVC & APTA pack will help form the basis of your advice, it's important there are no ambiguous question marks around the scheme information.
The first thing to look out for is the equalisation of benefits.
This may apply to anyone with servicing during 17 May 1990 and 5 April 1997. This is known as the Barber period, which was named after the ‘Barber and Allonby’ court case.
Following the case, the European Court of Justice ruled that “benefits should be equalised even in instances where there was no comparator of the opposite sex”.
The main focus around Barber benefits is to make sure you're confident whether they apply to your client.
If they do, they’re usually broken down separately to the main scheme benefits, due to Barber benefits being payable at an earlier than normal retirement age (NRA).
We’ve had multiple schemes provide us with what looks like full scheme information and a full benefit breakdown – only for us to run a TVC, see that the figures don’t quite add up and on questioning the scheme, establish there is a group of Barber benefits which they hadn’t disclosed to us.
Our recommendation would be to request confirmation of Barber benefits within your initial information request, depending on your clients’ service period.
Late retirement factors
Quite often, a scheme may have an NRA which applies to all benefits.
However, they may allow the member to take unreduced benefits from an earlier age, that is, an NRA of 65 and unreduced benefits available from age 60.
Generally, the NRA would be the age at which the benefits would become payable at their expected rate based on scheme revaluation.
On occasion, using the example above, the scheme may apply a late retirement to the benefits from age 60 (so for analysis purpose, the NRA becomes age 60).
The scheme may not provide these late retirement factors from the outset.
This also may not become clear unless you have an age 65 quote from the scheme, and are able to compare the benefits with TVC output.
For ease, we would recommend you include a request for late retirement factors and the ages they apply to/from in any initial information requests.
Early guaranteed minimum pension increases
You may be aware that your client has guaranteed minimum pension (GMP) benefits within their DB scheme, and that they’re looking to retire on those benefits before the GMP payable age. This is set at age 65 for men and age 60 for women.
Standard increases, whether that be fixed, section 148 order, or limited, are always applicable to GMP.
However, the benefits are only tested against these increases at GMP payable age.
If the client chooses to enter retirement before this time, they may receive only a proportion of their GMP or, on occasion, the scheme may not pay any at all until the client reaches GMP age.
Clarifying how the GMP benefits are increased before GMP age, both pre- and post-retirement, is vital when providing the client with their estimated benefits at retirement.
It will also provide a more accurate picture when including these benefits as part of cashflow planning when you're providing the TVC & Apta pack to your client.