As a follow up from my previous blog covering Letter of Authority Hints & Tips, I thought it would be great to delve a little deeper. The aim of this blog, as you may have established from the title, is to give you some tips on combatting those Defined benefit (DB) schemes!
Now, we all know how hot DB schemes are in financial services at the moment and most of us would rather hide in a darkened room than get involved, but fear not, I am here to shed some light on those dark corners…
I’m here to give you the tools required to ensure that we prod those DB schemes for all of the information that they don’t hand to us on a plate. Because, generally speaking, it’s that hidden bit of vital information which, when missed, could have the biggest impact on the client, when you’re producing the initial TVC & APTA pack. The TVC & APTA pack which helps form the basis of the advice your client is to take… So, I don’t think I need to stress how important it is that 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 17th May 1990 and 5th April 1997. This is known as the Barber period, which was aptly named after the court case ‘Barber and Allonby’.
Following this case, the European Court of Justice ruled that “benefits should be equalised even in instances where there was no comparator of the opposite sex”. Without delving too deep (I appreciate we’ve already taken it back almost 30 years… stay with me) the main focus around Barber benefits is to ensure that you are confident as to 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).
Believe it or not, 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 upon questioning the scheme, establish that there is a group of Barber benefits which they hadn’t disclosed to us.
Hopefully, this blog will help to prevent a delay for you and your client in future. 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, i.e. NRA of 65 and unreduced benefits available from age 60.
Generally speaking, 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 (therefore seemingly for analysis purpose, the NRA becomes age 60).
The scheme may not provide these late retirement factors from the outset and it 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.
Guaranteed Minimum Pension (GMP) increases pre-GMP age
This one will be applicable if you are aware that your client has GMP benefits within their DB scheme, and they’re looking to retire on those benefits before the GMP payable age (65 for males and 60 for females).
Standard increases, whether that be fixed, S148, 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 pre-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 in cashflow when providing the TVC & APTA pack to your client.
I hope this helps! If you have any questions regarding DB schemes and how Para-Sols can help – please get in touch!