Far from Trivial.....
Very few of us would automatically associate the words ‘Government’ and ‘Wisdom’ in the same sentence, as was proved to be the case by the government of the time that conceived the shake up to the UK pensions legislation in April 2006.
Simplification, or A-day as it was known, was designed to be just that; a Simplification of the existing pension rules but as many industry experts would argue, A-day was far from Simplification: in reality it further complicated most aspects of pensions, that prior to A-day would have been seen as quite ‘Trivial’.
Prior to A-day, the option of trivialising a member’s benefit was an attractive option to both the pension scheme members and Trustees alike. The sponsoring employer also had a vested interest as the trivial commutation rules were an attractive way of reducing scheme liabilities and therefore, ultimately keeping under control the contributions and possible deficit payments that are all part of a employer’s long term commitment to their pension fund.
Coupled with the continued increase by The Pensions Regulator for accurate record keeping and significant financial pressures on employers in the current economic climate, more than ever pension scheme Trustees are under increasing pressure to reduce their liabilities as well as the increased costs associated with running a company pension scheme.
As many Schemes increasingly look to consider their options of how they might best reduce their pension liabilities, being able to shape these decisions around a sound set of legislative principles that are conducive to simplifying the way in which pension schemes operate, is becoming more essential. Whilst at face value the current rules regarding trivial commutation do give pension scheme Trustees some manoeuvrability, since A-day there has been a continued expansion of legislation which has either directly or indirectly impacted the payment of pension benefits. This continued increase in legislative red tape has continued to further restrict the ways in which Trustees can reduce their liabilities. For example, if you take the current principles of trivial commutation, pension scheme Trustees quite often find that they are caught between an ever increasing population of members whose pension fund is so small that purchasing an annuity is not an option, due to the minimum purchase price threshold laid out by annuity providers. On the flip side, crystallizing a member’s pension fund under the current trivial commutation rules usually falls foul of the extensive qualifying criteria that must be safely and expertly navigated. The requirements for how a member has utilised a percentage of their Lifetime Allowance is one obvious example that quickly eliminates the possibility of trivial commutation.
So whilst Trustees and sponsoring employers alike are compelled to make their pension scheme data more accurate as a result of The Pensions Regulator’s recent pronouncements, there is equally an urgent need for a more balanced and flexible approach. Options such as Trivial Commutation enables Trustees and employers to balance the ever increasing costs of running a company pension scheme against the ability to effectively reduce and manage their ongoing liabilities.
In the current economic climate, whilst there are compelling reasons for purse strings to be tightened and financial liabilities to be robustly managed, many Trustees and employers are looking to take advantage of the benefits that Trivial Commutation can provide.
Until the government takes a truly holistic view regarding the framework of UK pension legislation and make options like Trivial Commutation simple and affective for members, Trustees and employers alike, then there will always continue to be a recurring pattern of good and simple ideas in practice, which in reality only serve to further complicate matters. Dare I suggest it is time for Simplification take 2?
by Richard Dicker
Senior Client Manager