We’re seeing a lot of sponsors asking their trustees to agree that members can be offered a cash inducement or a higher level pension in exchange for their giving up their entitlement to future increased in their pensions.
So what should the trustee‘s be thinking about before they say yes?
There are some obvious issues;-
Are the members being given a fair offer?
That needs to be tested. It’s one thing looking at the gross amount that’s on offer but what does this mean to the member’s tax position, not just now but in future years? And it’s not just income tax– employer and employee NI considerations come into this.
And what would the member be looking at… an LPI based increase, an RPI based increase or a CPI based benefit? Perhaps elements of his increase are revalued on a fixed basis.
If a trustee board are looking after the interests of their members they are going to have to think like IFAs and consider the impact of decisions like these in the round.
Once you start looking at the “member offer” then you need to think like a lawyer– this is an inducement and if there is any hint of mis-selling which you did not spot then you’d better watch your tail. Checking the nature of the communication is a major part of this.
Ideally, you’d allow the members to work things out for themselves, a modeller that could allow a member to look at their current tax position and the impact on it of taking the cash, taking a higher initial pension or staying put would be really helpful but does such a piece of kit exist?
My purpose in writing this is to get some feedback from the good people on mallowstreet.
Have you experience of this either as a trustee, a sponsor or an advisor (whether legal, tax, actuarial or as an IFA)?
If so, it would be great to hear your views and get a discussion going on what can or can’t be done to solve the trustee’s dilemma and ensure that members take informed decisions.