UK - Deferred final salary scheme members could be short-changed unless trustees consider all annuity options in wind-up, HighamNobbs Consulting warns.
The firm says flat pensions – an annuity without annual increases – are likely to give deferred members better value in today’s market than escalating pensions.
Partner Russell Agius said: “The cost of securing the pension increase element has increased substantially as interest rates have fallen – although few lay trustees appreciate the extent of the increase in cost.”
Legal & General has calculated that if a trustee secured a 1% per annum pension increase in today’s annuity market, deferred members could incur a reduction of 12% (compound) in the underlying pension payable.
Agius said: “This presents a dilemma for trustees – do they secure the highest possible flat pension (with minimal increases) or a potential severely reduced pension with full attaching increases?”
Independent trustees are wary of buying annuities without escalation as it could leave them open to claims later.
Eggar Trustees director Vernon Holgate said: “The question is whether we should expose our deferred members to the inflation risk by giving a larger deferred annuity.
“People could come back with their flat pensions and say they would have been better off if we’d bought them an annuity with escalation.”
Hammond Suddards Edge partner Phillip Sutton also agreed trustees must be careful when doing anything other than that transcribed in the scheme rules.
He said even if scheme rules did not have a provision requiring trustees to secure deferred pensions with fixed increases, it could not be assumed this provision was not implied.
But he added if trustees take a practical approach at point of buyout, and have seen potential for additional value, they have a good legal argument for their actions.
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