Consultancy Services - Liability Management
Pension Increase Work
Many companies are commencing exercises where members are offered
the opportunity for exchanging non statutory pension increases for
a higher non increasing pension. The basis of this exchange is
normally such that a source of uncertainty and risk is removed from
the scheme and the cost of the alternative benefits can be cheaper
for the scheme to provide.
Why are companies offering this option?
The principal reasons for companies asking Trustees to change the
scheme rules and offer this additional option are:
pensions are expensive to provide, especially when interest rates
are low, inflation is rising and longevity increasing.
The exchange is on the basis that the
cost of the alternative benefits leads to a reduction in deficit,
partially as a result of the member taking a higher tax free cash
there is an initial increase in pension payment (and PPF levy) the
overall liability reduces due to the increased cash payment and
conversion terms offered to members.
This option does not involve the company
paying for an incentive.
savings will only emerge over time (as members retire) it should be
possible to build an appropriate assumption in to Technical
Why would members exchange pension
benefit pension schemes provide members with limited choice at
retirement which has no reflection of their personal circumstances.
There are a number of reasons why a member would exchange increases
even if they are told the value of the alternative benefit is
shows that members with a choice (i.e. those who have to purchase
an annuity at retirement from a defined contribution scheme)
predominantly select a level pension to maximise the initial
number of pension scheme members an increasing pension in
retirement is franked against state benefits thus they may be no
worse off without the increases.
initial pension could lead to a higher tax free cash sum payable on
see the offer as good value (even where they are told the value is
lower than the original benefits) if their expectations on
life expectancy are shorter than assumed in valuing the
The cost of
living in retirement does not necessarily increase with inflation
as the level of activity reduces with age. Members want the highest
income when they are less active due to ill health and
Can this be offered to pensions in
the Trustees agreeing to the appropriate Rule changes it is
possible to offer this to pensioners but the option of higher tax
free cash is not available. Offering to current pensioners can give
an immediate impact on the deficit.
planned and implemented exercises can be a win-win for members,
companies and trustees. The first steps to such an exercise would
be a feasibility study to analyse current membership and model