Trivial commutations - back on the agenda?

Topic:

Hot topic

Date published:

Tuesday, 15 March 2022

Author:

Gillian Graham

My colleague asked recently if any of the pension schemes we work with are currently allowing trivial commutations where a member has GMP accrued after 17 May 1990. Co-incidentally, I’d just asked a scheme administrator to let me know when they expected to be able to do these again.

Down but not out

Offering trivial commutations had been put on hold due to uncertainty around tax and the danger there may need to be a further top up following GMP equalisation that might be an unauthorised payment. Most pension trustees wanted to wait for HMRC guidance. It means quite a few cases may have built up over the last few years.

HMRC tax guidance actually came out a while ago. Along with other guidance, principally from the Pensions Administration Standards Association (PASA) and pension lawyers, the situation is now a bit clearer.

What’s the situation now?

Sackers useful GMP equalisation essential planning guidance explains lump sums paid in the past will not stop being authorised simply because further benefit is identified that could not reasonably have been known about at the time of the original payment. This reflects the exceptional circumstances of GMP equalisation and applies once the scheme has chosen its equalisation method.

For trivial commutation – where the monetary limit applies to the value of a member’s benefits across all registered pension schemes - if GMP equalisation takes the value above the monetary limit, any adjustment cannot count as trivial commutation and a small lump sum might be an alternative.

However, paying out a second, even smaller, lump sum later to honour the member’s equalisation rights will be fiddly and could be disproportionately expensive, so trustees may still prefer to hold back on small lump sums where a later equalisation uplift seems likely.

Next steps

Once this has been resolved and factors are available again, it’s worth checking your pension scheme administrators have a proper process in place to check whether members and spouses are eligible for trivial commutation. In my experience, the administrator often overlooks this and is part of the reason why there are so many in scope for doing a bulk exercise!

This is usually a popular option for members - for one of my larger clients, the scheme actuary has advised there’s potential to reduce liabilities by £13m by running a trivial commutations exercise. So, it’s definitely worthwhile but with GMP equalisation grinding on, it may not be back on the agenda for a while yet.

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