The Government’s increase in State Pension Age (SPA) has implications for defined benefit pension schemes. Trustees and employers will need to assess the implication of this on their scheme, which may result in scheme amendments being required.
To assist trustees and employers, the Government has introduced legislation to help them make any required changes.
Bridging pensions and an increasing State Pension Age
Some defined benefit schemes pay a higher pension initially and then reduce the pension at SPA to reflect state benefits coming into payment. Such benefits are referred to as bridging pensions. As SPA increases this may have the unintended consequence of a bridging pension being paid for longer than was intended (creating funding implications) or members may experience a reduction in their total retirement income.
The specific wording of a scheme’s governing documentation should be checked to assess the existing terms for bridging pensions, and to determine whether amendments are required. The governing documents may refer to bridging pensions being paid to the commencement of state pension or SPA, with the result that payment of the bridging pension will be extended automatically to a member’s increased SPA.
Trustees and employers may not be able to amend their governing documents as there may be explicit restrictions in their amendment power or because of the statutory restrictions on amendments. In recognition of this the Government introduced legislation which gives Trustees power to amend their scheme rules by resolution from 1 October 2013.
The resolution can be used to amend bridging pension provisions which currently refer to specific ages between age 60 and 65, to refer instead to SPA or to any age up to SPA. As an alternative, existing references to SPA can be changed to refer instead to specific ages between 60 and 65. In addition, the regulations allow trustees to change the reductions used when calculating member’s pensions.
Conditions required to pass a resolution
There are several conditions which need to be satisfied to pass such a resolution including:
- The relevant bridging pension provisions require to have been in the scheme rules on 5 April 2010
- Where a pension is already in payment and the existing rules refer to State Pension Age, no amendment can be made which affects that pension
- The Employer must consent to the change In addition, the normal trust law duties will need to be considered by Trustees before taking any action.
Trustees and employers will need to consider whether, and if so how, their governing provisions should be adjusted to take account of the increase in SPA and take appropriate advice.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.