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Enhanced Transfer Values
For most employers with a final salary scheme which is closed to accrual, the ultimate objective in relation to the scheme is to remove its risks from the company balance sheet. Even where the scheme is still open, managing that impact or balance sheet is desirable.
An option available to employers wishing to take action in this area is an Enhanced Transfer Value (ETV) exercise.
Deferred members more than a year away from their normal retirement age have a statutory right to transfer their benefits to another pension arrangement. The value of that transfer is calculated on the pension scheme’s own transfer value basis. ETV exercises incentivise deferred members to transfer their scheme benefits into another pension arrangement.
The form of the exercise may range from simply reminding members that they have a statutory right to transfer to offering them an enhanced transfer value (offering a cash incentive is no longer viable). By transferring some deferred members’ benefits out of the scheme, a successful ETV exercise can reduce the size of the membership and liabilities of the scheme on all funding measures, with the enhancement paid being less than the anticipated additional cost of providing the benefit from the Scheme.
Alternative forms of enhancement:
- Current employees could be offered increased or guaranteed employer contributions to the employer’s money purchase scheme (particularly relevant where a company has closed its final salary scheme to future accrual), or
- Top-up payment by the employer to its money purchase scheme
Whether an ETV offer is in an individual member’s interest will depend upon their own personal circumstances. The ability to take a transfer value and shape the pension it secures in the way the member wants can be attractive, for example if the member has no spouse. The greater the value of the enhancement, the more members there are likely to transfer.
Since the member is carrying all of the risk and members should be given access to independent financial advice, and a proper process with clear paper trail needs to be followed.
There is a Code of Practice dated June 2012 covering ETV exercises developed by the pensions community’s Industry Working Group and supported by the Pensions Regulator.
Why Choose Pitmans’ Employer-Financed Retirement Benefit Scheme lawyers?
Pitmans’ Employer-Financed Retirement Benefit Scheme lawyers can:
- Advise on all legal aspects of the ETV process, including data protection
- Review communications with members
- Advise trustees on their duties where their employer proposes an ETV exercise