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Designing options (Focus on DB scheme) - Coggle Diagram
Designing options (Focus on DB scheme)
Option terms (factors to consider)
The objectives of interested parties
The provisions in the benefit scheme's documentation, regulatory and legal requirements
Whether to evaluate the option on a market-related basis or another basis
The relative value of the option compared to the expected cost of providing the 'regular' benefit.
The security of remaining benefits once the option has been exercised and of remaining beneficiaries following the option being exercised.
Benefits available before retirement
Some schemes offer members the option to choose the level of death in service benefits that suits their lifestyle
The opportunities to change the level of provision may be linked to significant lifestyle events, such as marriage or childbirth.
A non-pensioner member may have the right to transfer the actuarial value of the benefits to another pension arrangement. An enhanced transfer value may be available in certain circumstances.
Various types of benefit can be offered by the receiving scheme on transferring in; such as a DC account, a fixed pension or added years of service.
Members may be entitled to a refund of contributions on exit. These contributions may be restricted to member contributions only and may include interest.
Protection against ill-health may be provided through an Income Protection arrangement.
A member's pension is an asset that may be considered in a divorce settlement using pensions sharing or earmarking.
Benefits available at retirement
Some DB schemes provide the standard benefit as a pension and allow members to commute part of the pension for a lump sum
An early retirement pension may be available to members with the accrued pension being reduced to reflect the longer period over which it is expected to be paid.
A late retirement pension may be available to members which may allow for continued accrual or be actuarially increased for late payment.
Ill-health early retirement benefits may be prescribed in the scheme documentation subject to certain eligibility criteria
A transfer value at retirement from a DB pension scheme to a DC pension scheme may be ordinarily available. This may enable the member to take advantage of the benefit flexibilities which may be available at retirement from a DC pension scheme
A pension increase exchange (PIE) may be ordinarily available where members convert their own pension to a different pension with a different level of pension increases
A full commutation exercise may be ordinarily available where pension benefits are exchanged for a lump sum, thus removing the liability from the scheme.
Benefits available after retirement
If income drawdown is chosen there will be post-retirement options available to a DC scheme member
A PIE exercise may be offered to DB scheme pensioners whereby they exchange their current pension for an alternative pension with different pension increase entitlements
Consent
If consent from the employer is required, this enables the employer to consider the effect on employment planning of the individual's choice and extra pension costs that are incurred due to the choice.
If consent from the trustees is required, this enables the trustees to consider whether granting a benefit for one member or group of members would adversely affect the security of benefits for other members.