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13 Jun 2019
by Gillian Graham

How to help pension scheme members facing the Grim Reaper

Sadly, in the past year, I’ve had to help two pension scheme members each with a prognosis of less than 12 months to live. My own father died of cancer when he was 51 so I feel these situations acutely. These particular cases raised issues it would be beneficial for others to know about so we are all better able to help members and their families in future.

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No ill health retirement option for deferred members? Here’s how we found a way round
It isn’t unusual for a defined benefit (DB) pension scheme to have no ill-health retirement option for deferred members. In this case, the member had just been diagnosed with motor neurone disease. She complained because the early retirement pension quoted had been reduced (in line with the scheme rules). Understandably, she felt this was unfair given her medical diagnosis.  

As secretary to the trustees, I asked the administrator and scheme actuary to provide a serious ill-health quotation. I felt the member may be able to provide sufficient medical evidence for the trustees to allow this pension to be fully commuted. It came out as a lump sum of 8 times the annual reduced pension quoted plus a 50 per cent spouse’s pension - which still didn’t look very generous to me!

So, my next step was to request a transfer value quotation. When this came through, I thought it must be wrong – it was 60 times the annual reduced pension! The actuary assured me it was right and was down to the very low gilt yields at the time. 

I set out all the options available to the member but we both knew it was a ‘no brainer’ to choose to transfer to an arrangement where she could take her benefits more flexibly. What it did mean was she had to obtain suitable financial advice before the trustees could pay the transfer out of the scheme – another potential hurdle. 

Pension trustees are typically nervous about recommending financial advisers, preferring to point members in the direction of websites that help them choose their own. The reality is this is a bit of a lottery and can take time. As the member hadn’t completed the advice process within the three month transfer value guarantee window, I asked the trustees to agree to a one month extension. They did and the member was able to complete the transfer in time.

A person is more important than process 
The second case involved an active member. The serious ill-health benefit quotation didn’t appear to be good value, particularly because the employer knew no spouse’s pension was needed as the employee’s wife had already died. 

As before, I suggested pursuing a transfer value option. The member’s illness meant time was short, but it was extremely important to him to be able to leave as much as possible to his sons. The chair of trustees agreed, given the circumstances, I could offer the services of an IFA from a sister business within our wider group. 

The financial adviser pulled out all the stops to meet the member, provide advice and arrange for discharge forms to be signed in record time. Sadly, the member died before the transfer could be paid. Fortunately, as the employee’s intentions had been made clear, the employer agreed to the trustees’ request for the death benefit to be increased to the full amount of the transfer value.

What can we learn?
For me, there are two clear lessons from these sad cases:

  1. Pension scheme trustees should quote transfer values as a matter of course in any ill-health case. Actuaries may well warn this amounts to selection against the scheme, but we’re human and we care so most trustees and employers would agree to override this concern. 
  2. Time is of the essence - and when time is tight it just makes sense to help in every way possible. If that means recommending someone you know will be competent and compassionate and provide suitable advice, so be it.

The author is Gillian Graham, client director at Punter Southall Governance Services.

This article is provided by Punter Southall Governance Services. 

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