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Sadly, I have recently been involved with two separate cases where pension scheme members have been given a prognosis of less than 12 months to live. I’m acutely aware of these circumstances as my own father died of cancer when he was 51.
Clearly it is vital to help members and their families at this very difficult time, but these cases brought to light issues I think should be highlighted so those of us involved are better able to help in future.
Finding a way around the no ill health retirement options for deferreds
The first case came to my attention because, not unusually, the member’s pension scheme had no ill-health retirement option for deferreds, and the member complained the early retirement pension quoted had been reduced. She felt this was unfair, given she had just been diagnosed with motor neurone disease.
As pension scheme secretary, we asked the administrator and scheme actuary to provide a serious ill-health quotation. We thought the member may be able to provide the medical evidence needed to enable the pension trustees to permit full commutation of the member’s pension. Although this option amounted to a lump sum of 8 times the annual reduced pension quoted plus a 50% spouse’s pension, it still didn’t look very generous!
So, we also asked for a transfer value quotation. When I received this I thought it must be wrong – it amounted to 60 times the annual reduced pension! The actuary assured me it was correct due to exceptionally low gilt yields at the time.
We laid out the full options available but, frankly it was a ‘no brainer’ to opt for the transfer value in this case. Of course, it did mean the member needed to obtain suitable financial advice before the scheme could make the transfer.
Pension trustees are generally nervous about recommending IFAs and prefer to point members in the direction of websites to make their own choice, but this is a bit of a lottery and can take time. In this particular case, the member had not managed to complete the process within three months so we asked the pension trustees to agree to extend the guarantee for a further month. They did this and, fortunately, the transfer was then completed in time.
Think about the person
The second case involved an active member, so the pension scheme sponsor was very much involved. The serious ill-health benefits initially quoted did not seem to be particularly good value, given the employer knew no spouse’s pension was needed as the member’s wife had already died.
As for the example above, I suggested a transfer value option may be worth pursuing. The Chair of the pension trustees agreed that, under the circumstances, I could offer the services of an IFA from PSFM, our sister company. It was enormously important to this member that he was able to leave as much money as possible to his sons.
PSFM pulled out all the stops to meet the member, provide the advice, and arrange for the member to sign the discharge forms in record time. Sadly, the member died before the transfer value could be paid. However, in this instance, as the forms had already been signed, the Company agreed to the pension trustees’ request for the death benefit to be augmented to the transfer value amount.
What can we learn?
The conclusions I draw from these sad cases are:
(1) Pension trustees ought to quote transfer values as a matter of course in all ill-health cases. Actuaries may warn this amounts to selection against the pension scheme, but most trustees and employers would agree to override this.
(2) Time is of the essence - and when time is tight it just makes sense to help in every way possible. If that means recommending someone you know will be competent and compassionate and provide suitable advice, so be it.