Many schemes find the current rules about commutation of small “trivial” pensions restrictive. New rules relating to the commutation of trivial pensions by pension schemes will come into force on 1 December 2009. In addition to the current method, schemes will be able to make a trivial commutation payment of up to £2,000, without reference to benefits from any other pension arrangements.

Most schemes will need a rule change to implement the new rules.

Background

Currently, members may commute all of their pension for a lump sum if the value of all of their pensions from all arrangements, amounts to less than 1 per cent of the lifetime allowance in force at the date of commutation (currently this limit is £17,500). However, individual schemes have found this provision difficult to administer in practice because of the need to take account of members’ total pensions from other arrangements.

What are the changes?

The Registered Pension Schemes (Authorised Payments) Regulations 2009 [SI 2009/1171] (the Regulations) came into effect on 1 June 2009. The Regulations introduce an alternative method of commuting trivial pensions which applies to commutation payments made on or after 1 December 2009: Schemes will be able to commute pensions with a value of less than £2,000 without reference to benefits from any other arrangements, subject to making appropriate rule amendments. There are a number of conditions which all schemes have to meet, such as:

  • the whole of a member’s benefit must be extinguished by the payment;
  • payment must be made between the ages of 60 and 75; and
  • no transfer of a member’s benefit can have been made out of the scheme in the last three years before commutation.

There are special provisions for schemes which have more than 50 members in total, including pensioners (large schemes). For large schemes, although the value of benefits to be commuted is not limited (in contrast to smaller schemes, see below) the trivial commutation payment itself cannot exceed £2,000. In addition, broadly there must not have been any transfer in for the member during the five years before commutation.

The requirements for smaller schemes differ in some respects (for instance, the member’s benefits in a smaller scheme, regardless of the value of benefits the member may have in other schemes, must be valued at £2,000 or less), and in addition to the three year transfer out requirement from the scheme, there must not have been a transfer out of any scheme relating to the same employment in the three years before commutation.

Further draft regulations have been issued by the Department for Work and Pensions, which are intended to make identical amendments in respect of all contracted out benefits, also effective from 1 December 2009.

Other small payments and overpayments

The Regulations also deal with a range of other small payments which can be commuted without being classed as unauthorised payments, such as compensation under the Financial Services Compensation Scheme and payments to or in respect of untraceable members aged 75 or over.

Overpayments, for example as a result of late notification of a member’s death, or through administrative oversight, were strictly unauthorised payments if they amounted to more than £250, and were not reclaimed by scheme trustees. In many cases, trustees were sensitive to making demands on a family at a difficult time for the member’s relatives and personal representatives. A number of these previously unauthorised payments are now classed as authorised payments. Many schemes will not require a rule amendment in respect of these easements, but the administrators should be aware of them.

Action

Many trustees and employers will wish to take advantage of the new trivial commutation rules, so we advise a check of scheme documentation now, to see whether any changes are needed in order to introduce the new provisions from 1 December 2009.

In many cases, a short deed of amendment can be executed under the scheme’s amendment powers, which normally require the agreement of the scheme employer and trustees.