Many employers now use group life assurance policies to insure death benefits for employees, but the trusts that sit behind these policies are often ignored.
Our group life and employee benefits team have put together nine top tips for employers to consider when reviewing their group life arrangements and considering whether the trusts that are used to hold the policies and pay benefits in the event of a member's death are fit for purpose.
1. Find your group life trust deed
This one sounds basic, but it's all too often the case that trust deeds go missing. If you have a group life policy that pays into a trust but you no longer have a trust deed, then distributing death benefits will present problems as decisions must be taken in accordance with the rules of that trust. This problem can often be resolved with a replacement trust deed but you should take legal advice before replacing a missing trust deed. We have extensive experience of helping employers of all sizes with this issue.
2. Consider updating your deed if it's more than 10 years old
There have been significant changes to the tax and regulatory regimes covering group life trusts over the past 15 years. As a rule of thumb you should consider updating the trust documentation if it's more than 10 years old. Even if the deed is more recent, you should consider having a legal review carried out, especially if you previously relied on an insurer's standard trust documents.
3. Check with HMRC to see whether you have registered the trust and if you have any other registered trusts
Once you've found your trust deed and considered whether or not to update it, you'll also need to make sure the scheme is registered with HMRC and whether you have any subsequent trust deeds (or other schemes registered with HMRC). You should be able to use your pension scheme tax reference (PSTR) number to check this for registered group life trusts. If you have difficulty obtaining this information your employee benefits consultants may be able to help.
4. Identify your employers
The sponsoring employer may not be the only employer whose employees are intended to benefit from membership of the trust. Often, the terms of the trust will require other employers to complete a formal deed before being included as participants. Where the sponsor's group has changed over the years, it is important to review the trust and the policy terms and, if necessary, complete a new deed of participation and policy schedule to ensure that the right employers are included, so that its employees can benefit from the favourable tax treatment granted under the trust.
5. Check your insurance policy against the trust deed
In some cases the benefits and eligibility provisions contained in the trust deed and rules will no longer be consistent with the insurance policy covering your employees. It's essential that the benefits conferred by the trust deed are also covered in the policy, as the employer could potentially be on the hook for providing these benefits if the insurer doesn't pay out. In cases of doubt, take legal advice on this point.
6. Ensure you have up to date expression of wish forms for members
If you're content that your trust deed and policy are consistent with one another and are up to date with current legislation you should ensure that you have sufficient information to make a decision on death benefits if a member dies in service. You should regularly remind members of the need to update their expression of wish forms. As the trustee can only rely on forms that relate to the current trust, you should ensure older forms are updated as soon as there is a change.
7. Take legal advice in the event of a member's death
Any discretionary decision as to who to pay benefits to in the event of a death in service will fall to the trustee. It is essential that the trustee exercises its discretion in accordance with the powers and duties contained in the trust deed and under general trust law principles. You should take legal advice in the event of a member's death, first gathering all relevant information about potential beneficiaries before deciding who to make a payment to based on that relevant information (and excluding any irrelevant factors). This decision should be carefully minuted in case it is challenged by a potential beneficiary at a later date.
8. Consider whether an excepted group life trust would be appropriate for you
Excepted group life policies (EGLPs) offer an alternative way for employers to provide death in service cover which is outside of the registered pension tax regime. This is particularly attractive to employers with large numbers of high earners and members with protection against the pensions lifetime allowance. Care will need to be taken in the drafting of a trust to hold an EGLP, and it is essential that you take legal advice before setting one up, but there are potential benefits for both the employer and employee in taking this approach as set out in our back to basics paper (insert link).
9. Check your EGLP's list of potential beneficiaries
If you already have an EGLP, you may be affected by a change in tax law from April 2019. The Finance Act 2019 replaced an outdated requirement that contributions to the trust could only be paid free of income tax if the beneficiaries to whom death benefits could be paid were limited to the member's "family or household". Now, EGLPs can pay to a much wider range of individuals or registered charities and still receive the same beneficial tax treatment. However, the April 2019 changes are not overriding, so if you want it to apply to your own trust, its rules should be checked, to confirm whether an amendment is needed first.