Which rules apply to which scheme beneficiaries?

08 / 10 / 2019

This is a critical question which is all too frequently overlooked.  The natural tendency, when faced with a member query, is for a trustee, employer or administrator to simply reach for the “current rules”.  It is important to keep at the forefront of one’s mind that it is not necessarily the current rules which apply to all members.

Trust based schemes, in particular final salary schemes, are often long-standing schemes with several sets of rules and numerous deeds of amendment.  It is not a safe assumption that the historic rules lose all importance and use once a new set of rules is adopted.  Indeed, the historic rules can very much apply to the provision of benefits for certain members and/or their dependants.

It is often specified, in a set of rules, that those new rules only apply to members who are in pensionable service with the employer (i.e. are actively accruing benefits within the scheme) at the date those rules were adopted.  Occasionally a new set of Rules will apply to all Members, irrespective of when they ceased to be in pensionable service.  Essentially the only way to work out which set of rules applies to which members is to delve into the provisions of the trust deed and/or rules which specify to whom they apply.  An added layer of complexity is that a set of rules may prescribe that they only apply to members in pensionable service at the date they were adopted with the exception of certain limited provisions, which are to be applied to all members.  The variety of approaches taken by different schemes, and even by different sets of rules adopted over the years by the same scheme, are numerous.  Care must therefore be taken when determining which rules govern the benefits of a particular beneficiary!

Why is this distinction so important?  The answer lies in the nature of pension provision – it is constantly changing!  Legislation is often permissive (i.e. it will allow a benefit to be paid in a certain manner provided the rules of the scheme in question also permit payment of the benefit in such a manner).  Two examples are:

  • legislation permits pensions to be paid to members who have attained age 55, but the scheme rules will specify whose consent, if any, is needed to that “early retirement”.  Attitudes to early retirement have changed over the years, some schemes historically did not permit it, others may have had more stringent consent requirements than they do presently; and
  • legislation provides for trivial commutation of benefits at a certain level (which is much higher now than it has historically been), however, a scheme can only make use of those new increased levels of trivial commutation if the scheme’s rules permit it.

Often the historic scheme rules will hard-code certain statutory limitations which apply at the time the rules in question are being drafted.

When those statutory limitations change years down the line those changes are often reflected in a new/current sets of rules via a consolidation exercise or a deed of amendment.  But this doesn’t automatically mean those changes are also reflected in historic sets of rules.  If you have deferred members whose benefits are governed by historic sets of rules, the treatment of those members and their benefit entitlements may be dramatically different to a member who became deferred more recently, or who retires from active service, simply because of the provisions of the rules which govern the payment of their benefits.  So, looking at the two examples provided above:

  • you may have some members who are only entitled to retire at age 65, some who are entitled to retire from age 55 but only with consent from the sponsoring employer/and or trustees, and some who have an absolute right to start receiving their benefits from age 55; and
  • you may have some members who are only entitled to trivially commute their benefits if they are under £18,000 (or even less if the pre-“A-Day” limits were hardcoded into the historic scheme rules), and some who are entitled to commute benefits if they are under £30,000 (being the current limit, assuming the member doesn’t have any other pension savings elsewhere).

Paying benefits at the incorrect level can have all sorts of negative implications including the need to correct the issue once it is realised resulting in unanticipated costs and protracted correspondence with members, this can result in high professional advisers’ fees, disgruntled members, reputational issues and potentially IDRP applications, Ombudsman complaints and ultimately court action against the trustees for breach of trust.

The important message is:

  • make sure you and your advisers are crystal clear about which set of rules applies to which members; and
  • ensure the correct rules are applied when corresponding with such members and calculating their benefit entitlements.

We are always on hand to help trustees, employers and scheme administrators determine which set of rules they should be applying in any given instance.  Please feel free to contact us if you have any concerns regarding the application of historic sets of rules.