Cost of living and pensions: how can trustees support their members?
Published on 1st Feb 2023
Seven steps for defined benefit trustees to support members
The Pensions Regulator (TPR) has issued guidance to the trustees of defined contribution (DC) schemes on actions to take to support members in light of the current economic climate, but what can (or should) defined benefit (DB) pension scheme trustees be doing? We suggest seven action points for DB trustees.
1. Familiarise yourselves with your scheme's transfer out and opt-out powers
You might start to see an increase in transfer queries or requests as members explore transferring their DB pension to a DC arrangement in order to take advantage of the pension flexibilities or an increase in opt-outs due to members trying to maximise their take home pay.
We recommend that you review your scheme's opt-out powers and consider reminding members (possibly with the scheme employer) of the benefits of remaining an active member of the pension scheme. If employees need to be an active member of the scheme in order to be covered for death-in-service benefits, do they understand this and are you and the employer still comfortable with this approach?
Trustees should also be familiar with their scheme's transfer out power. It is important to understand when there is a statutory right to transfer; when a member might need to ask for a non-statutory transfer; whether any consents are needed for a non-statutory transfer; and how the trustees will approach requests.
Access to financial advice or education might help members in both situations. It might be worth talking to the employer about arranging for an external adviser to provide a financial education session or materials designed to support members by providing them with information at this time. In the case of opting-out and transfers out, this might include a reminder to members of the value of remaining in the scheme and signposting them to sources of help, advice, and information about scams.
In terms of more formal financial advice, members whose DB benefits trigger the £30,000 threshold will have to take independent financial advice before they can transfer. Trustees should encourage other members considering a transfer, or opting out, to consider financial advice or guidance.
TPR and the Financial Conduct Authority (FCA) have issued guidance on helping members by establishing a list of independent financial advisers that they might like to use (which would need to be kept under review) and on how the employer can pay for financial advice. This guidance should be read with the related Pensions Ombudsman factsheet.
Trustees should familiarise themselves with the scheme's current position on independent financial advice and how it is paid for. They should consider whether that position remains fit for purpose or should be revisited.
2. Consider how you can educate and support members to minimise scam risk
TPR, the FCA and the Money and Pensions Service have issued a warning to pension scheme members that scammers may try to exploit the worry and uncertainty caused by cost of living increases, interest rate rises and fears over the economy.
They make a number of suggestions and remind trustees of the need to "follow best practice in protecting savers from scams – including warning them of the heightened risk of pension and investment scams in times of uncertainty and providing some of the common signs of a scam".
Trustees should check that they are following the legal framework for transfers (set out in the Pension Schemes Act 1993 and the 2021 pensions transfer regulations) and industry best practice, including in relation to signposting. They should also consider taking legal advice in any transfer case where they have concerns.
3. Consider the impact on early retirement
Schemes might find that an increasing number of members approaching age 55 (the earliest age at which most members can retire other than in ill health) wish to consider early or flexible retirement in order to access income, or their tax-free lump sum.
If there is an increasing number of members at the lower age range making applications, then this might raise the question of whether general information or financial education along the lines discussed above would be helpful. For example, members might be swapping (more or less) uncapped revaluation for capped annual pension increases. It is not the employer or the trustees' role to give financial advice, or try to take decisions for members, but some general information and a prompt to consider taking financial advice or guidance may be helpful.
Trustees should continue to keep early retirement factors under review with their actuarial and legal advisers to ensure they remain appropriate for their scheme. If early retirement is not cost neutral, the trustees may wish to review their approach to requests, again with actuarial and legal advice. If there is an increase in the number of members taking early retirement, trustees should also be mindful of the impact of members taking tax-free cash on the scheme's cash flow and take advice on this point.
4. Review discretionary increase powers
For pensions in payment that increase in line with inflation subject to a cap (for example 5% pa), this year means that the pension paid to many pensioners is expected to reduce in real terms by around 5%. The position may be worse for older pensioners, who might have earned all or most of their pension before April 1997 and so have very limited rights to pension increases
Scheme rules might give the trustees, the employer or both, a discretion to pay additional increases. The rules may also require the pensions in payment to be reviewed on a periodic basis, with a view to such discretion being exercised if appropriate. As the cost of living continues to rise, it is possible that members will start to ask questions about the pensions increases they receive, particularly if they are aware their pension scheme is well funded or in surplus. (We suggest actions for trustees and employers in our Insight.)
5. Review application and complaints procedures
The Pensions Ombudsman recently considered a complaint by a member of the NHS Pension Scheme who said that he accepted a (reduced) early retirement pension instead of renewing an application for ill health early retirement (IHER) because he would not have had an income while IHER was being reviewed and would probably have lost his home.
The complaint was not upheld (there was no finding of delay or maladministration), but the case is a reminder of the financial impact that the time taken to process applications for payment of an IHER or other benefits - and consider any related complaints - can have on members. As the cost of living continues to rise, members might be more likely to complain about delay and or a decision that benefits should not be paid. With this in mind, trustees might review their application and complaints procedures to ensure they are efficient and sound.
6. Check service provider contracts
We suggest that trustees review their service provider contracts to see if they contain any provisions which link annual fee increases to the increase in the index (which could result in an exceptional increase). Where such provisions do exist, trustees should consider how they will operate, what will be their impact (are there any caps?) and explore with their legal advisers whether there are any ways in which the issue might be addressed.
7. Consider the wider position
Trustees should also, of course, keep under review the impact of current conditions on the scheme, investments, and employer covenant.
This insight was written with assistance from trainee solicitor Kim Arnold Radford