News | September 23, 2021

PART 5 – Death benefits: do your scheme rules reflect modern life?

We have the benefit of seeing a vast array of benefit structures in our role as advisers to trustees of final salary pension schemes.  One of the areas in which variety is most prevalent is death benefits and the individuals who may receive those benefits.

Certain parameters and restrictions are prescribed by tax and other legislation and must be adhered to in order to prevent an unauthorised payment and the resulting unauthorised payment charges becoming payable.

Once the legislative requirements have been complied with there is scope for significant flexibility when designing the structure of death benefits.  One of the points which is increasingly becoming a hot topic during trustee meetings is the payment of a pension, upon the death of a member, to that member’s non-spouse partner.

Most final salary schemes were set up decades ago, when life was a little more traditional.  That doesn’t necessarily mean the rules have to stay that way forever.

With more people co-habiting and having long-standing relationships without formalising them by getting married or entering into a registered civil partnership we would encourage all trustees (and indeed employers) to consider whether their scheme rules facilitate the benefit provision they would now like to provide to members and their loved ones.

Many schemes provide for a pension to only be payable to someone whom the deceased member was married, or had entered into a registered civil partnership with.  Under such a scheme, are the trustees and sponsoring employer comfortable that this may mean:

  • a pension will be payable to that spouse even if the member is estranged from that spouse at the time of their death?; and
  • no pension will be payable to someone who had been in a long, financially dependent relationship with the member if the member had not divorced their ex-spouse/civil partner?

It seems somewhat archaic that a spouse who no longer speaks to their ex (but remains legally married to them) and received no financial support from the member in the years leading up to their death should receive a pension from the scheme. 

It could also be argued that it seems unjust (and potentially against the objectives/purpose of the scheme in question) that a pension wouldn’t be payable to someone who had been in a long-standing committed relationship with the deceased member, who was bereft by their loss and financially destitute or in financial difficulty because they had been financially dependant on that member.

At the very least it may be that the trustees of such schemes would like to have the discretion to grant a different outcome in cases such as these. 

Scheme funding must, of course, also be considered.  The scheme actuary will be able to confirm the assumptions used for the purposes of funding the scheme – for example, the actuary may have assumed that 80% of the membership may result in a spouse’s pension becoming payable – whereas introducing the discretion mentioned above could potentially result in a funding strain on the scheme. 

Even if a pension isn’t payable it may be that a lump sum might be payable to an aggrieved partner who doesn’t qualify for a spouse’s pension – although a lump sum won’t be payable in every instance (for example, some schemes don’t pay a lump sum upon the death of a deferred member, and there may also be guarantee periods to contend with if the member was a pensioner).

We’re not encouraging wholesale changes to the rules of  these schemes, however we would encourage an open dialogue between trustees and employers whereby they check the instances where such benefits would and wouldn’t be payable and check they’re comfortable with that position.

Whilst it may be possible to amend the rules as a reaction to a more complex case, the delays caused to communications and payment of benefits if discussions are left until such a case occurs would be best avoided by a discussion now, before such a case arises.