Active, deferred or pensioner: different status, different rules?
“In this world, nothing can be said to be certain, except death and taxes.” Benjamin Franklin, 1706 – 1790
A centuries-old quote, that really rings true when looking at the changing shape of workplace pensions in the UK over the last few decades. The most obvious aspect of this being the shift from defined benefit (DB) to defined contribution (DC) arrangements. However, even those fortunate enough to still be members of DB schemes, may not end up being entitled to receive the full level of benefits they believe are guaranteed.
I’m not just referring to the well-publicised occurrences of schemes reducing member benefits or having to enter the Pension Protection Fund (PPF). There is also the lesser-known issue of many schemes offering very different death benefits, depending on whether you are an active, deferred or pensioner member. Sometimes benefits can even vary dramatically simply because a member didn’t complete the necessary forms. A colleague of mine recently dealt with such a case – and I thought I’d share the rather sad story in this article. It’s a poignant reminder of just how important it is for employers and trustees to clearly and effectively communicate the intricacies of their scheme with employees and members.
Mr X was a deferred member of a DB pension scheme and, at age 59, decided to apply for early retirement benefits. The scheme’s normal retirement date was age 65.
The scheme provided Mr X with all the relevant information and paperwork. This confirmed that Mr X was entitled to early retirement benefits of a pension of £14,000 per annum, or a lump sum of £70,000 plus reduced pension of £11,000 per annum. Should Mr X pre-decease his spouse, Mrs X would be entitled to a 50% spouse’s pension. The scheme also had a five-year guarantee period, so if Mr X died during the first five years of receiving his benefits, Mrs X would receive his full pension for the remainder of the five-year period.
Mr X then became ill – and understandably was more concerned with his health than filling in forms. He therefore never completed the paperwork to start drawing his early retirement benefits. His health rapidly deteriorated and, sadly, he died.
Mrs X then applied to receive her spouse’s benefits, assuming she would receive the figures that had been quoted in Mr X’s early retirement paperwork. However, because Mr X had never returned his forms, Mrs X was only entitled to significantly reduced benefits. The scheme confirmed that she would receive a 50% guaranteed minimum pension (GMP) benefit of £1,500 per annum, plus a refund of member’s contributions equalling about £3,000.
Concerned at the difference between what she thought she would receive and the benefits she was actually offered, Mrs X appealed the decision. First, she used the internal dispute procedure – they confirmed that all scheme rules had been followed correctly. Then she appealed to the discretion of the trustees, who were not prepared to show any discretion in the level of benefits paid to Mrs X. Finally, she went to the Pensions Ombudsman, who also confirmed that the scheme rules had been followed correctly and did not uphold the complaint.
Despite the unfortunate outcome, the scheme trustees did not do anything wrong. They provided Mrs X with the spouse’s benefits she was entitled to, based on the scheme rules. Plus, in the vast majority of cases, being a member of a DB scheme is still a very good thing. However, it makes me wonder how many deferred members of DB schemes do not fully understand what benefits they, and their dependents, might receive. Death may be certain; death benefits might not be. Clear, relevant and timely communications, along with simple forms and paperwork, are crucial.
As an industry, we’ve made huge strides forward in these areas over the years – but there is still a long way to go. As this story shows, educating our members and helping them achieve a good outcome from their pension savings, is not an issue that is confined to DC schemes alone.
This article was first published with REBA on 25 July 2017.