Leavers Fact Finding (Final Salary)


Salary Related Schemes 

In a salary related scheme, often referred to as a defined benefit scheme, the scheme rules will describe how a member's benefits should be calculated on leaving service, retirement or death. This element of the resource material will concentrate on the calculation and communication of leaver benefits for a salary related scheme.

The case studies that you will study in the examinations will include two (2) salary related schemes, one of which is a CARE (Career Average Revalued Earnings) scheme:

  • The RST Pension Scheme (which is not contracted out)
  • The XYZ Pension and Life Assurance Scheme (which was contracted out for Category A members until 5 April 2016 but was never contracted out for Category B members)

There are three (3) distinct leaver calculations and candidates will be tested on each of these in the examinations:

  1. Refund of contributions (for members who are "active" when they leave the scheme)
  2. Preserved pension (for members who are “active” when they leave the scheme)
  3. Transfer out (for members who are “active” when they leave the scheme)

It should be noted that, for the Transfer out option, it will only be necessary for learners to ‘state’ the option (assuming the option exists on leaving the scheme).


Fact Finding

1. How and when can contributions be refunded?

If a member has completed less than two (2) years of qualifying service in a salary related scheme, then a refund of contributions will be offered.

When a refund of contributions is paid, the amount payable depends solely on the contributions paid by the member. These contributions may include interest, depending on the rules of the scheme.

Historically, if a scheme was contracted out prior to 6 April 2016 (and the refund related to any period of service before 6 April 2016), an amount was deducted from the gross refund equal to the National Insurance (NI) saving that the member had made through being contracted out of the State Second Pension (S2P) for the period before 6 April 2016.

This amount was called the Certified Amount (CA). The CA was repaid to the State along with the saving that the employer additionally made through the member being contracted out. The combined saving repaid to the State in respect of the member and the employer was known as the Contribution Equivalent Premium (CEP).

The remaining contributions are refunded after the deduction of tax at the rate of 20% on the amount up to £20,000 and 50% on any amount above £20,000.

Additional Voluntary Contributions (AVCs), typically including interest and / or investment growth, are added to the gross refund prior to the deduction of tax.

TIP: Although many schemes apply interest to member contributions, the RST Pension Scheme and the XYZ Pension and Life Assurance Scheme do not. Additionally, AVCs for these schemes are refunded without taking into account investment growth.

The links below provide further information in relation to refunds:

From 6 April 2006, members who leave a scheme with three (3) or more months but less than two (2) years of qualifying service have had the added option of a cash equivalent transfer value as an alternative to the refund option.

Although not obliged to do so, some schemes may additionally offer the option of a preserved pension when a member leaves the scheme with less than two (2) years of qualifying service. Sometimes, the scheme rules will stipulate a minimum period of qualifying service in the scheme for this option to apply.

For the RST Pension Scheme, members with three (3) months or more but less than two (2) years of qualifying service, and who have no transferred-in benefits, have the choice of:

(a) Refund of their own contributions without interest, or

(b) Preserved pension, or

(c) Cash equivalent transfer value to another pension arrangement.


It should be noted that, for the RST Pension Scheme, the preserved option is permitted regardless of the length of qualifying service if the reason for leaving is redundancy.

For the XYZ Pension and Life Assurance Scheme, members with three (3) months or more but less than two (2) years of qualifying service, and who have no transferred-in benefits, have the choice of:

(a) Refund of their own contributions without interest, or

(b) Cash equivalent transfer value to another pension arrangement.

It should be noted that, for the XYZ Pension and Life Assurance Scheme, the preserved option is additionally permitted provided the member leaves with one (1) year or more of qualifying service and the reason for leaving is either due to ill-health or dismissal other than for fraud or misconduct.

2. How and when can benefits be preserved?

If a member has completed two (2) years or more of qualifying service in a salary related scheme, then a preserved pension will be offered.

See previous section on refunds to see other circumstances in which benefits can be preserved under either the XYZ Pension and Life Assurance Scheme or the RST Pension Scheme.

Under the XYZ Pension and Life Assurance Scheme for Category A members, a preserved pension is based on a default pension accrual rate of 70ths (although members can vary their contribution rate in exchange for a rate of 60ths or 80ths), the member`s period of pensionable service (measured in years and days) and the member`s final pensionable salary (best pensionable salary in the last 5 years) at the date of leaving the scheme.

Under the XYZ Pension and Life Assurance Scheme for Category B members, a preserved pension is based on a pension accrual rate of 60ths, the member`s period of pensionable service up to 3 July 2011 (measured in years and days) and the member`s final pensionable salary (either best pensionable salary in the last 5 years from the date of leaving or, if greater, final pensionable salary at 3 July 2011 increased by RPI).

Under the RST Pension Scheme, a preserved pension is based on the member`s CARE pension calculated up to 5 April prior to the date of leaving plus a proportionate amount from 6 April up to the date of leaving.

The CARE pension at the date of leaving is then compared to an `underpin` pension based on 1/100 x pensionable service (measured in years and complete months) x final pensionable salary (based on contractual salary). If this results in a higher figure, then the `underpin` pension rather that the CARE pension applies.

Benefits under the RST Pension Scheme must be split pre 6 April 2006 and post 5 April 2006 due to the different rates at which these elements of pension increase in payment.

For both the XYZ Pension and Life Assurance Scheme and the RST Pension Scheme, the preserved pension is revalued from the date of leaving to normal pension date. In the event of the member retiring earlier than normal pension date, then the preserved pension is revalued to the date of early retirement date, with an early retirement factor then being applied.

Should retirement occur after normal pension date, then the preserved pension is revalued to late retirement date for the RST Pension Scheme. However, for the XYZ Pension and Life Assurance Scheme, the preserved pension is revalued to normal pension date, with a late retirement factor then being applied.

Under the XYZ Pension and Life Assurance Scheme, the GMP for Category A members is increased during the period of deferment using the fixed rate revaluation method. It is also possible for schemes to adopt the full rate revaluation method whereby the GMP is increased fully in line with the increase in average earnings (Section 148 orders).

For the fixed rate method of revaluation the percentage rate to be applied depends on the date the member left the scheme (see table below). The number of years of revaluation at this percentage rate will be based on the number of complete tax years between the date of leaving and GMP due date (or earlier date of retirement). Further statutory increases will apply in the event of retirement occurring after GMP due date (age 65 for males and age 60 for females).

       

6 April 2017 onwards

3.5%

6 April 2012 to 5 April 2017

4.75%

6 April 2007 to 5 April 2012

4.0%

6 April 2002 to 5 April 2007

4.5%

6 April 1997 to 5 April 2002

6.25%

6 April 1993 to 5 April 1997

7.0%

6 April 1988 to 5 April 1993

7.5%

6 April 1978 to 5 April 1988

8.5%


For salary related schemes, there are also legislative requirements for the revaluation of a member`s preserved pension over and above the GMP. The rate of statutory revaluation to be applied to various elements of pension is dependent on when the member left pensionable service as follows:

  • Date of leaving before 1 January 1986 - No revaluation on pension over and above GMP
  • Date of leaving between 1 January 1986 and 31 December 1990 - No revaluation on pension earned before 1 January 1985 but RPI increases (to a maximum of 5% per annum) on pension earned from 1 January 1985
  • Date of leaving between 1 January 1991 and 5 April 2009 - RPI increases (to a maximum of 5% per annum) on all pension earned
  • Date of leaving after 5 April 2009 - RPI increases (to a maximum of 5% per annum) on pension earned to 5 April 2009 and RPI increases (to a maximum of 2.5% per annum) on pension earned from 6 April 2009

Scheme rules can stipulate increases to the various preserved pension elements over and above the GMP at different rates to those outlined above provided the statutory minimum requirements are met.

The Pensions Act 2011 implemented the Government`s policy to use CPI in place of RPI as the preferred index for determining revaluation in deferment. The Pensions Act confirms, however, that no CPI underpin is required where schemes continue to increase by reference to the RPI.

Under the XYZ Pension and Life Assurance Scheme, the whole of the pension in excess of the GMP at the date of leaving is increased by RPI subject to a maximum of 5% for each complete year from date of leaving to date of retirement.

Under the RST Pension Scheme, the whole of the pension is increased by CPI subject to a maximum of 5% for each complete year from date of leaving to date of retirement.

The links below provide in depth information on further items and considerations which are relevant to the calculation and treatment of preserved benefits:

3. How are communications with the member / trustees made?

Once the benefits have been calculated they need to be communicated to the member and / or trustees of the scheme in the form of a letter. The examinations will expect candidates to write letters to include all the facts and figures that are required to be communicated.

For leaver case studies from the RST Pension Scheme and XYZ Pension and Life Assurance Scheme all letters should include the following (where applicable):

1. Member's date of leaving and normal pension date

2. Preserved pension on leaving (with actual values for pension splits [pre-1988 GMP, post-1988 GMP and excess elements for XYZ Pension and Life Assurance Scheme; and pre-2006 and post-2006 elements for RST Pension Scheme])

3. Revaluation to normal pension date (with actual values for revalued elements, as stipulated above)

4. Lump sum option at retirement (subject to the remaining pension covering the GMP, if applicable)

5. Death before retirement: 

  1. refund of contributions (including payee)
  2. spouse / civil partner's pension (if applicable)

6. Death after retirement:

  1. lump sum death benefit of balance of 5 years' pension payments (including payee)
  2. spouse / civil partner's pension

7. Post retirement increases (with actual rates for pension splits [pre-1988 GMP, post-1988 GMP and excess elements for XYZ Pension and Life Assurance Scheme; and pre-2006 and post-2006 elements for RST Pension Scheme)

8. Transfer value option

The list is not definitive and all letters must, for example, refer to any special circumstances and additional information contained in the case study.