Pension benefit design consultancy

Our client had a DB scheme that was closed to new members but still open to accrual for existing members. Their objective was to try to keep it open to accrual but to contain risks and pocket costs. They had worked with a previous adviser and had identified a Career Average structure as the likely solution.

We worked with them to reconfirm their objectives and constraints and it became clear that the Career Average solution did not meet their criteria since it effectively addressed the one risk that the employer could control anyway – pensionable salary increases. We also identified that, given the market conditions and increased funding deficit, a more fundamental change would be required.

After extensive discussions with the employer, the following benefit structure was decided upon:

• A reduction in the accrual rate from 1/60th to 1/80th (for future service).

• A cap on pensionable earnings increases of 1% pa (for past and future service).

• Closure of the scheme to accrual in five years.

This solution enabled the employer to be able to afford and mitigate the risk of continuing accrual for five years while giving members plenty of notice of the future closure. The pensionable earnings cap reduced the past service deficit as well as the ongoing future cost.

We then worked with the employer to agree to this structure with the trustees and carry out a consultation exercise with the members.

Our client had a DB scheme that was closed to new members but still open to accrual for existing members. At the previous funding valuation, a pensionable earnings cap had been put in place in response to the increased deficit and ongoing funding costs then revealed.

The latest valuation revealed further increases in the deficit and ongoing costs. We worked with the employer to formulate the following benefit structure:

• Closure of the scheme to future accrual

• Ongoing pension provision via the existing DC arrangement with enhanced contribution rates

• A mechanism that would allow members to transfer their DC pots into the DB scheme at retirement to be used to cover the tax-free lump sum

This allowed members the opportunity to retire with a core DB benefit and fully flexible benefits of a DC pension scheme or to maximise their DB benefit and tax-free lump sum.  It also allowed the employer to control its on-going pension costs and contained the DB risk.

We then worked with the employer to agree on this structure with the employees’ union and pension scheme trustees and carry out a consultation exercise with the members.