In a salary related scheme, often referred to as a defined benefit scheme, the scheme rules will describe how a member's benefits should be calculated on leaving service, retirement or death. This element of the resource material will concentrate on the calculation and communication of death benefits for a salary related scheme.
The case studies that you will study in the examinations will include two salary related schemes, one of which is a CARE (Career Average Revalued Earnings) scheme:
There are three distinct death calculations and learners will be tested on each of these in the examinations:
Death in service benefits (for members who are "active" and who die either before or on / after normal pension date)
Death in deferment benefits (for members who have left the scheme and are "preserved" and who die before retirement)
Death in retirement benefits (for members who are "retired" and who die whilst in receipt of a pension)
1. What happens on death in service?
Death in service benefits are paid in respect of active members of a scheme at the date of death; whether the members die before or on / after normal pension date.
Lump sum death benefits on death in service
On death in service before normal pension date, lump sum death benefits typically comprise a life assurance benefit and a refund of contributions (including AVCs).
If death in service is on / after normal pension date but before age 75, the lump sum death benefit (if applicable in the scheme rules) is typically calculated as 5 years of pension payments (capped to age 75) based on the pension the member would have received had retirement occurred on the date of death.
Life assurance benefits are generally insured. This means that the scheme must pay a premium to an insurance company who will then be responsible for paying out life assurance benefits when they fall due. Alternatively, life assurance benefits may be funded and paid directly from the scheme. In either case, the value of the life assurance benefit is the same.
Refunds and lumps sum death benefits which are based on the pension payments that would have been paid over a specified period are generally paid directly from the scheme.
Pensions on death in service before normal pension date
On death in service before normal pension date, schemes usually provide a pension for the surviving spouse / civil partner. This pension may be based on a percentage of accrued pension up to the member's date of death but, more often, the pension is a percentage of the prospective pension that the member would have received at normal pension date.
TIP: For the XYZ Pension and Life Assurance Scheme, the total member's pension cannot be less than the GMP accrued between 6 April 1978 and 5 April 1997 and any accrued pension before 6 April 1978 and after 5 April 1997.
There may also be provision in the scheme rules to provide pensions to:
These additional provisions apply equally to death in service on / after normal pension date, death in deferment (provided a pension is payable, which is NOT the case for the RST Pension Scheme) and death in retirement.
Where a member`s spouse / civil partner is considerably younger than the member (typically more than 10 years younger) some schemes apply a reduction to the spouse`s / civil partner`s pension to reflect the probability that the pension will be payable for a longer period of time. This is the case for the RST Pension Scheme.
Pensions on death in service on / after normal pension date
It is usual practice in the event of death in service on / after normal pension date to treat the member as having retired on the actual date of death. As such, where a lump sum death benefit is payable, it is typically calculated as 5 years of pension payments (capped to age 75) based on the pension that the member would have received had retirement occurred on the date of death. Similarly, where a spouse`s / civil partner`s pension is payable, it is typically based on a percentage of the pension that the member would have received had retirement occurred on the date of death.
2. What happens on death in deferment?
Death in deferment benefits are paid in respect of preserved members (or opted-out members) of a scheme at the date of death.
Lump sum death benefits on death in deferment
Cover for life assurance generally ceases when a member leaves pensionable service. If a member is opted-out (leaves the scheme but not the company), then life cover may continue but sometimes at a lower rate.
There is no life cover for preserved members of the RST Pension Scheme or XYZ Pension and Life Assurance Scheme. The lump sum death benefit for these schemes is simply a refund of scheme contributions (without interest) and a refund of the AVCs paid for the RST Pension Scheme and a refund of the value of the AVC's for the XYZ Pension and Life Assurance Scheme.
Pensions on death in deferment
The scheme rules will determine whether or not a spouse's / civil partner's pension or a child dependant's pension is payable on death in deferment.
Further details are included in the relevant scheme booklets.
3. What happens on death in retirement?
Death in retirement benefits are paid in respect of retired members of a scheme at the date of death.
Lump sum death benefits on death in retirement
On death in retirement, a lump sum death benefit is generally payable provided the member dies within a specified period (typically 5 years).
Should the member die within the specified period then the lump sum death benefit is usually equal to the value of the remaining payments to the end of the specified period (capped to age 75).
Should the member die outside the specified period there is usually no lump sum death benefit payable.
Pensions on death in retirement
On death in retirement it is normal for a spouse's / civil partner's pension to be payable expressed as a percentage of the deceased member's pension in payment at the date of death plus the value of any commuted pension revalued to the date of death. The percentage is typically 50% but can be up to two-thirds depending on the rules of the scheme.
In the XYZ Pension and Life Assurance Scheme the spouse's / civil partner's pension is 50% of the member's pension in payment at the date of death. In the RST Pension Scheme it is 40%. Additionally, if the member took a tax-free cash sum on retirement then the commuted pension for both schemes is revalued to the date of death prior to applying the appropriate percentage.
TIP: Depending on the rules of a scheme, the spouse's pensions may cease on remarriage. Also, the rules may prevent payment of a spouse's pension if the deceased member and spouse have been married for less than 6 months.
4. How are communications with beneficiaries / trustees made?
Once the benefits have been calculated they need to be communicated to the beneficiaries and / or trustees of the scheme in the form of a letter. The examinations will expect learners to write letters to include all the facts and figures that are required to be communicated.
For death case studies from the RST Pension Scheme and XYZ Pension and Life Assurance Scheme all letters should include the following (where applicable):
1. Member's date of death
2. Lump sum death benefit (stating the actual values for each component) payable either to persons at the Trustee's discretion or to the deceased member's legal personal representatives
3. Spouse's pension (stating the actual values for the pension splits [pre-1988 WGMP, post-1988 WGMP and excess elements for the XYZ Pension and Life Assurance Scheme; and pre-2006 and post-2006 elements for the RST Pension Scheme])
4. Pension increase rates and dates for increases (stating the actual rates for the pension splits [pre-1988 WGMP, post-1988 WGMP and excess elements for the XYZ Pension and Life Assurance Scheme; and pre-2006 and post-2006 elements for the RST Pension Scheme])
5. Value of lump sum death benefit (stating that it counts against the deceased member's remaining 'Lump Sum & Death Benefit Allowance')
6. Requirements for payment:
The list is not definitive and all letters must, for example, refer to any special circumstances and additional information contained in the case study.
