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UPDATES TO CONTENT

This Update revises content at this site www.gpt-online.com and updated pages are automatically sent to subscribers to the hardcopy Guide for Pension Trustees. To help you locate the most recent changes, see the table: Summary of Main Revisions from this Update at the bottom of this page.

Open Market Option – guidance from the Pensions Regulator

The Pensions Regulator has issued some very useful and comprehensive guidance – Occupational DC schemes – good practice in member retirement options and the open market option, May 2008 – to help trustees consider the arrangements under their scheme relating to ‘member retirement options’.

To recap, under an open market option the member, or dependant, has a right to take the proceeds of their Defined Contribution funds out of their occupational scheme in order to buy an annuity at a current market rate from an insurance company of their choice. [1.11.15 (Note) refers].

The Regulator’s guidance is to be welcomed. Among other things, it serves as a useful reminder that members have a legal right to an open market option (under the Finance Act 2004). The right applies under occupational schemes that offer benefits on a Defined Contribution basis; under AVC arrangements within Defined Benefit schemes; and under schemes that provide cash sums. Group personal pension schemes are excluded (on the grounds that the member has the necessary control).

Under the guidance, trustees should put in place a process that ensures: 
(a) the member (or dependant) is told about their options at retirement, including the availability of the open market option 
(b) the member’s fund can be converted into an income, and that 
(c) information is issued at an early stage to enable members or dependants to exercise their open market option.
The Regulator also points out that, where Defined Contribution benefits are insured, the trustees will need to ensure that the insurance company’s procedures will fit in with scheme practices and processes. 

In covering the guidance, Section 1.11 has been expanded: not just for compliance purposes but also because shopping around for an annuity can often produce a significantly better benefit. ‘Figures provided by the FSA suggest that some people may be able to improve their annuity by as much as 30% by shopping around.’ The difference might be even greater when the member qualifies for an impaired life annuity. Thus ‘it is important that an informed choice can be made’.

A number of sections of the Guide have also been updated with details from the Regulator’s guidance on the open market option. 

In addition, the Pension Regulator’s Trustee toolkit www.trusteetoolkit.com/arena/index.cfm provides information on the open market option in a section specifically relevant to DC schemes. This also gives information about other different ways of providing a retirement income from occupational Defined Contribution schemes. 

Section 1.11.15 (Note) provides a listing of some of the current on-line resources available to members approaching retirement. These include:
wwww.fsa.gov.uk/tables – FSA Comparative Tables on pension annuities 
www.moneymadeclear.fsa.gov.uk – FSA Money made clear guides 
www.thepensionservice.gov.uk/ – information about pensions and pensioner benefits 
www.pensionsadvisoryservice.org.uk – The Pensions Advisory Service (TPAS) 
www.unbiased.co.uk – help in finding an IFA 
(Note: a wider list of useful sources is provided in the Regulator’s guidance).

Open Market Option – disclosure of information

For the timescales involved in informing members about their retirement options see 11.1.7 (o) and (p) and their respective Notes.

Conflicts of Interest

In June 2008, Section 3.4 and 15.3.2 (Note) were updated following the Pensions Regulator’s guidance on conflicts of interest. Section 3.4 has been expanded further to add to the detail on how to manage conflicts, or potential conflicts. Included is a definition of ‘conflict of interest’.

Conflicts of interest – remuneration of trustees

In general, trustees are not entitled to remuneration from their scheme’s fund for acting as a trustee unless this is permitted by the trust deed or rules or court order. Section 4.2.6 confirms the position in general relating to trustees’ remuneration. The Pension Regulator’s opinion on the remuneration of trustees can now be found in 4.2.7.

Conflicts of interest – role of independent trustee

Section 4.6.6 (Note) confirms the Pensions Regulator’s opinion in respect of the appointment of an independent trustee in the context of (a) managing conflicts of interest and (b) having the correct mix of trustees to suit the scheme’s circumstances.

Conflicts of interest – recording in minutes of meetings

Minutes of trustees’ meetings should record all decisions taken and the key factors considered in reaching any decision. Where a conflict of interest is identified at the beginning of any agenda item [see 3.4.5 (Note)] the minute should record the action undertaken to manage the conflict; either agreement that the conflict was deemed to be inconsequential with no action required, or how the conflict was managed [see 7.2.1 (Note)].

Relations with advisers – best practice guidance

The Pensions Regulator has issued best practice guidance setting out issues for trustees to consider in their relations with advisers. Its document identifies important and general issues for trustees to consider and specifically covers the appointment of scheme actuary, auditor, legal adviser, scheme administrator, independent financial adviser and benefit consultant. Several sections of the Guide have been updated accordingly, in particular Sections 8.1 and 8.2.

Money Laundering Regulations 2007

Section 10.5.12 (Note) confirms the regulations also apply to individuals who are paid to be pension scheme trustees and/or to individuals who are directors of corporate trustees and acting ‘by way of business’. This could potentially catch a number of trustees and directors of corporate trustees who are paid more than a token amount for their time and, for those involved, registration under the Act will likely be necessary, though there may be a partial easement from registration for persons already supervised under professional bodies.

Summary Funding Statements

Actuarial liabilities continue to be excluded from the net assets statement of Defined Benefit schemes (for the time being at least). However, the inclusion of Summary Funding Statements in the trustees’ annual report is being encouraged: see 12.9.3 (Note).

Occupational Pension Schemes (Transfer Value) (Amendment) Regulations 2008

Detail about the calculation of transfer values after 1 October 2008 is now included in 13.6.4 (Note), 17.4.1 and 17.4.2.

Under the regulations, the minimum transfer value is to be calculated as an amount 
(a) on a ‘guarantee date’ 
(b) being the trustees’ best estimate of the expected cost of providing an alternative pension entitlement (allowing, if decided, for any options and/or discretionary benefits previously available under established custom) and 
(c) having regard to market rates of return. 
Transfer values are also to be calculated on a scheme-specific basis and may be reduced, if trustees decide, to allow for under-funding. Separately, an amount greater than the minimum may be paid, subject to the requirements of the scheme rules, which may call for employer consent.

(Note: an indication of a potential discretionary benefit would be the award of any discretionary dependant’s pension payable where there was no spouse or civil partner at death.)

Converting pension rights into cash sums – unauthorised payment charges

When converting members’ pension rights into cash sums at retirement, regard should be had to the possibility of incurring liability for any subsequent unauthorised payment charge, should it transpire the cash paid should have been taxed at outset. One operational approach now recognised by HMRC is for trustees to seek to obtain a discharge from the member before payment, confirming that the member will meet any sanction charge, whenever, or if ever, levied. [24.5.3 (Note) confirms]

Study material

As may have been mentioned before, the Guide started out as a document called ‘Study Notes for the Trustee Certificate of Essential Pensions Knowledge’. Today, students for a range of pension examinations are known to use the Guide as a study aid and the Guide’s Updates include information pertinent to the latest pension questions. Sections 25.0 and 25.1.11 (Note) confirm information about the role of the Pensions Regulator and about online returns submitted to the Regulator.

STOP PRESS

At the time of going to press, the Pensions Regulator has issued Record Keeping: a consultation paper. In the paper, the Regulator states that it wishes to work on scheme record keeping with those involved with it and, in preparing some of its proposals, it has liaised with ‘Raising Standards of Pensions Administration’, the Society of Pension Consultants and the Pensions Management Institute. The detail will be covered in the Guide’s next Update, as appropriate.

SUMMARY OF MAIN REVISIONS FROM THIS UPDATE

The Guide's regular Updates help keep it up to date with important and topical new items, but changes to pages can also include new technical terms, changes to organisations' names, new cross-references and a variety of minor revisions, as well as description of legislative, technical and other material, and useful tips or simply interesting additions. Here is a summary of the main changes made by this Update.

This update loaded 22 September 2008

Previous 'What's New' Items.