Guidance
Trustees may need to know whether lump sum death benefits can be provided from their scheme or whether a separate scheme, which only provides these benefits, should be set up.
Issued: June 2006
Likewise, if you are an employer sponsoring a pension scheme you may want to be sure that the scheme is set up properly.
The regulator's role
If the regulator receives notification of a breach of the law, we are primarily concerned with any risks to members' benefits which such a breach may pose.
In determining whether a scheme is in breach of s255, we accept that there may be a legitimate range of legal opinion on particular facts.
We do not consider that potential reporters have reasonable cause to believe that a breach of s255 has occurred where they have advice that a breach is possible but not likely.
Where reporters do have reasonable cause to believe a breach has occurred, they should note that not every breach of s255 is likely to be of material significance to the regulator. Reporters should assess the cause of the breach, its effect, the reactions to it and any wider implications it may have.
What are lump sum death benefits?
For the purpose of this guidance, lump sum death benefits are benefits paid on the death of a scheme member in the form of a cash sum.
If death benefits which could be provided as a cash sum are actually paid as a pension (for instance, where the trustees of a scheme decide to buy an annuity for a person rather than paying them a cash sum), the death benefits concerned will still count as lump sum death benefits for the purpose of this guidance.
Considerations
Group life only schemes
The regulator's view is that there is no objection to the establishment of schemes which only provide lump sum death benefits ('group life only' schemes).
However, it's clear that following the amendment of the definition of 'occupational pension schemes' and following s255 of the Pensions Act 2004, such schemes are no longer considered to be occupational pension schemes (under the Pension Schemes Act 1993, the Pensions Act 1995 and the Pensions Act 2004, or for the purpose of regulation by the regulator).
As a consequence, if an employer did not previously have to designate a stakeholder scheme because of a group life only scheme that was in place, that employer will now have to meet the stakeholder designation requirement.
Employers who are affected should have designated a stakeholder scheme by 22 December 2005 (three months from the date the amended definition had effect), and must certainly take steps to do so immediately if previously unaware of the position.
Cross-border schemes
If a UK scheme has members in another EU member state who were members of the scheme for lump sum death benefits (and who continue to accrue benefits in the UK scheme and if contributions for those benefits were paid to this scheme), this could result in the scheme being required to apply for authorisation and approval to operate cross-border.
If, however, the contributions were made to a separate life assurance scheme, authorisation and approval would not be required.
If the members are deferred members of the scheme but remain employed by the employer, then contributions to the scheme for lump sum death benefits will not result in the scheme being required to apply for authorisation and approval to operate cross-border if these benefits are calculated by reference to the members' salaries at the date of deferment.
However, if there is any remaining link to current or final salaries for the calculation of lump sum death benefits, then the cross-border regulations may apply.
Providing lump sum death benefits
In general, the regulator's view is that:
- where an employee has been offered membership of a pension scheme for pension benefits; or
- where an employee will be offered membership of a pension scheme for pension benefits if they remain with the employer for long enough,
it would be acceptable for that employee to be provided with lump sum death benefits as part of a package of benefits under that scheme.
In such cases the provision of lump sum death benefits can be seen to ancillary and supplemental to the provision of retirement benefits. This is so whether or not the member takes up that offer.
Increase or reduction in benefits
It does not affect our view if such benefits are increased or reduced.
Life assurance cover for retired members
The continuation of life assurance cover (in any form) for retired members would also, in our view, be acceptable.
Scenarios
The following scenarios illustrate some situations that may be encountered in practice. They explain how the regulator sees s255 operating.
There may be other circumstances where it is not clear if the provision of lump sum only death benefits would be contrary to s255 of the Pensions Act. In such cases, the trustees may well wish to seek their own professional advice.
Scenario 1
Employees awaiting membership of schemes
In the regulator's view the provision of lump sum only death benefits to employees who are in a 'waiting period' before they are eligible to join a scheme, is likely to be acceptable.
This would be so whether this waiting period is an employment condition (a probationary period for example) or a condition of the scheme itself, provided that, if they remain in employment, they will be offered membership of the pension scheme.
However, there is a problem if such benefits were offered to new employees who were already close to their normal retirement date and who, because of the waiting period or other rules of the scheme, would never be eligible for pension benefits.
In such a case, because the employees concerned will never be offered pension benefits, the provision of lump sum death in service benefits from the scheme could infringe the terms of s255 of the Pensions Act.
The scheme trustees should consider whether alternative arrangements should be made to provide these benefits.
Scenario 2
Employees who have declined membership or who have withdrawn from membership of pension schemes
In the regulator's view the provision of lump sum death benefits to employees who have declined membership or have withdrawn from membership of a pension scheme is likely to be acceptable without infringing the terms of s255 of the Pensions Act.
Provided they were offered membership of the scheme at some point, this is so whether or not they accepted that offer.
Scenario 3
Schemes closed to new entrants and schemes closed to future accrual
Existing members
In the regulator's view the provision of lump sum only death benefits is likely to be acceptable for existing members who have pension benefits in schemes that are closed to new entrants for pensions accrual, or even for existing members of pension schemes that are closed to future accrual of pension benefits entirely.
New entrants for lump sum only death benefits
In the regulator's view, if a scheme is closed to new members or is closed for the future accrual of pension benefits, accepting new members into the scheme for lump sum only death benefits could place the scheme in conflict with the terms of s255 of the Pensions Act.
In these circumstances, if lump sum only death benefits are to be provided for new employees, this provision should be through a separate arrangement.
The employer should consider whether they need to designate a stakeholder scheme for such new employees.
Schemes closed to new entrants and schemes closed to future accrual where pensions are being provided under a separate scheme
If a pension scheme is closed to new members for pension benefits, or is closed for the future accrual of pension benefits but new members are provided with lump sum death benefits under this scheme and with pension benefits under another scheme of the same employer, it is possible that this may not infringe the terms of s255 of the Pensions Act.
This would be so, provided that there is a sufficient concrete and identifiable link through the employer between the provision of the lump sum death benefits under the one scheme, and the pension benefits under the other scheme.
Such a link would need to be stronger than the simple fact that the two schemes were set up and run by the same employer.
It is not possible for us to provide examples of the 'sufficient concrete and identifiable link through the employer' because, as scheme circumstances vary, any such examples could prove to be misleading.
The trustees of any closed pension schemes which offer lump sum death benefits to new entrants may wish to take professional advice to ensure that the death in service benefits provided by the closed scheme are properly supplementary and provided on an ancillary basis to the retirement benefits provided by another scheme which is open to the same employees.