Manage the risks involved with potentially expensive final salary schemes with pension increase exchange. Find out more here.

Do Pitmans' Pension Increase Exchange Lawyers Have Any Particular Areas of Expertise?

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 the impact on balance sheet is still desirable.

An option available to employers wishing to take action in this area is a Pension Increase Exchange (PIE) exercise.

Under a PIE, an employer offers members the option of giving up future pension increases in return for a higher immediate pension. Such an offer can be attractive to members who have a preference for higher levels of immediate income. For employers, a PIE can:

  • Reduce the risks associated with future pension increases, ie inflation and life expectancy
  • Reduce the scheme’s funding deficit because the terms of exchange share the saving between the member and employer
  • Give members more choice over the shape of their retirement income

The offer can also be made to current pensioners, and introduced as a new option at retirement for active and deferred members.

A PIE is restricted to giving up non-statutory pension increases, ie the offer is to give up annual increases beyond the minimum required by statute, limited price indexation on pension earned after April 1997 and GMP earned between 1988 and 1997. The increases given up would be exchanged for a one-off increase in the amount of pension from the scheme. That additional pension can also enable additional tax-free cash to be taken by the member as a pension commencement lump sum.

Unlike an ETV, the capital investment required to carry out a PIE is restricted to the cost of implementing the exercise, as there are no enhancements to fund. A PIE merely reshapes the type of pension the member receives. It can therefore be attractive to an employer that wants to take some action to reduce final salary risks but has short-term cash constraints.

Since the member is carrying all of the risk and members should be given access to independent financial advice.

There is a Code of Practice dated June 2012 covering PIE exercises developed by the pensions community’s Industry Working Group and supported by the Pensions Regulator.

A variation is total pension increase exchange (TPIE) where a member transfers to a DC scheme, from which there is no a statutory obligation to provide pension increases, so allowing a higher immediate (non-increasing) pension to be provided. Typically this would involve a transfer of members before their pension began, with the expectation that an annuity would be purchased straight after transfer to secure a certain non-increasing retirement income.

See also Enhanced Transfer Values and Trustees’ Powers and Duties

Why Choose Pitmans’ Pension Increase Exchange Lawyers?

Pitmans’ Pension Increase Exchange lawyers can:

  • Advise on all legal aspects of the PIE process
  • Review communications with members
  • Draft appropriate amendments to scheme rules
  • Advise trustees on their duties where the employer proposes a PIE exercise.