Pensions and Other Benefits
Pensions and Other Benefits tests defined benefit (DB) and defined contribution (DC) arrangements from funding through to member outcomes. You need the UK statutory framework: The Pensions Regulator, the PPF, scheme funding, transfer values, and the tax rules that changed in April 2024.
DB funding and risk
- Ongoing valuation versus buy-out/solvency basis; technical provisions, recovery plan and affordability judged against the employer covenant.
- Investment strategy: de-risking glide paths, liability-driven investment for matching, buy-ins and buy-outs as endgames.
- Employer debt on exit (section 75), PPF entry tests and compensation (90% of accrued pension subject to a cap for members below normal pension age).
- GMP equalisation and indexation with CPI/RPI caps and floors.
DC and member outcomes
- Auto-enrolment minimum is 8% of qualifying earnings, at least 3% from the employer; the default fund charge cap is 0.75%.
- Default strategies, lifestyling, decumulation options and Consumer Duty apply to the whole member journey.
- Tax: the lifetime allowance was abolished from 6 April 2024 and replaced by a GBP 268,275 lump sum allowance and a GBP 1,073,100 lump sum and death benefit allowance.
Worked example
GBP 400 a month (GBP 4,800 a year) for 30 years at 5%: 4,800 x [(1.05^30 - 1)/0.05] = 4,800 x 66.44 = about GBP 319,000. If charges cut the return to 4.25%, the factor falls to about 58.5, giving GBP 281,000 - the 0.75% charge costs roughly GBP 38,000 over the term.
Traps
- Quoting an ongoing funding ratio as if it were the buy-out ratio.
- Setting a recovery plan without testing it against the employer covenant.
- Treating a cash equivalent transfer value as the value of the promise.
- Forgetting caps and floors on pension increases and GMP equalisation.
- Presenting a DC pot as a guaranteed retirement income.