Paying to people who are alive today and will be alive next century

henry tapper

12 months ago

Let’s not hide pension longevity from the young.

I have a very mystified CEO concerned that a pension scheme should be looking to pay pensions beyond the life expectancy of him and presumably his pension executive/trustee

Let me give you a worked example from a real member of our closed scheme. I think the youngest member is a man aged circa 45. The scheme was closed at least 20 years ago. Under our scheme rules (which I think reflected then best practice) it assumes that he could be married to a woman 20 years younger who would receive a 50 % widows benefit until her death. This was done to avoid an 85 year old man marrying an 18 year old on his death bed and she might then receive said benefit until she met her (or his, in this brave new world) maker.

Even so, if said 45 year old member were to marry a partner on Monday morning aged 25 under current mortality tables she would be expected to live a further 61-63 years. That means, in the worst case, the scheme would be on the hook for her liabilities until 2088. Do you really want to have said liabilities on the books until at least 2088?

Pension liabilities are extremely long because we live a long time and (in this case) we can trigger a pension for someone who’s likely to lengthy long period longer.

Managing the administration of pensions for 60 years ahead is not a sensible thing to do. Even if the cost of buying an annuity is high, it is worth it if there no other pensions to pay.

But the situation in question involves a deliberate intention to keep the scheme going. Our CEO explains his concern

I am absolutely astonished that you are considering re admitting members to your scheme.

But lets cast our minds back to the days when pension schemes were being set up in the 1970s, 80’s and 90’s. Here the liability for pensions was as long as the capacity of the employer to fund the scheme, the members wanting to pay their contributions and the trustees to run the pension into eternity.

The only problem foreseen by First Actuarial was the closure of the pension scheme first to new members and ultimately to existing members who became deferred or pensioners.

Derek Benstead points out that the cycle of benefit payments on an open DB plan is 120 years.Only after 120 years will pensions be payable in line with the value of the money in the scheme.

The reality of pension schemes is that they take time to come to equilibrium when benefits are paid from income from investment.

Byron McKeeby
byron.mckeeby@outlook.com
192.0.87.124

In England & Wales, personal discretionary trusts established after 5 April 2010, have a maximum duration of 125 years, as set by the Perpetuities and Accumulations Act 2009.

Before 2010,a common law rule of “lives in being plus 21 years” was used to determine the maximum trust duration. This meant a trust would terminate 21 years after the death of the last person alive at the time the trust was created who was named in the trust instrument.

The Perpetuities and Accumulations Act 2009 does not apply in Scotland. It is specifically stated that the Act only extends to England and Wales.

Scotland has its own legal framework, including rules on accumulations, which may differ from those in the 2009 Act.

The Trusts and Succession (Scotland) Act 2024 is the latest Scots Law legislation which received Royal Assent on 30 January 30 2024. While the Act passed, not all provisions were immediately enacted.

Some sections, particularly those related to succession, came into effect on April 30, 2024. Other provisions regarding trusts, however, may require further steps by Scottish Ministers to be fully implemented.

I don’t know whether either or both of these Acts apply to pensions trusts, and one or more of your legal followers may wish to comment about this.

Some “Scottish” pension trusts may also have been written under English law.

This is the duration of a pension scheme run over time – it is around 120 years. This is a very weird idea but it is infact how pensions used to be. Clearly we cannot pay contributions for 120 years, none of us are living long indeed, but we have the responsibility to pass on pension liabilities and assets to younger people.

It is extremely rare to hear trustees and executives have time frames of 120 years, but they should have if they intend to pay pensions to those who join the company, join the pension scheme and can expect to be receiving pension benefits into their 90s. If you are younger than 25 , you won’t be 100 till you are in the next century. Now there’s a thought!

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