Old does not necessarily mean vulnerable for Pies

A pension increase exchange exercise invites members with inflation-linked future pension increases to give up this entitlement in return for a one-off increase, which is immediately effective but does not increase in future.

In short, that means offering members more money today at the potential cost of losing out further down the line.

The advantage of these exercises to the scheme sponsor is twofold.

First, future costs are fixed in respect of members that accept an offer, which means any potential buyout will be easier to achieve.

Second, in the event the member survives longer than a set period, a lower amount of pension will have been paid than the member would otherwise have been entitled to receive.

Ensuring fair offers

The advantage to a member in accepting the offer of a higher pension now at the potential cost of receiving less in total will be dependent upon a number of factors such as lifestyle, health and other pensions or assets that can provide an income with a hedge against inflation.

Some fit and healthy members over the age of 80 will have a firm grasp of the risks

The value of Pies will usually be explained by the use of ‘crossover’ and ‘break-even’ points.

The crossover point is the date that a members pension is calculated to be less than the scheme would have been paying – with some assumptions around future inflation.

The break-even point is the date that the total value of the increased pension is less than the scheme would otherwise have provided.

All of these future dates will be based upon some actuarially calculated factors that can be confusing for the average member, let alone an elderly or vulnerable individual.

The industry code issued in June 2012 introduced the concept that members who could be deemed vulnerable “by virtue of age, health [and] understanding” may require special treatment.

It also requires that members over the age of 80 should only receive an offer if they have first been sent a letter asking them to opt in to the process. This initial letter should be unbiased, factual and not seek to influence the member.

Vulnerable scheme members

The code also states that all member advisers should have a vulnerable client policy when providing advice. Interestingly enough, however, it is acceptable to have a different procedure when the member adviser is only providing guidance.

From the scheme’s perspective the code is very helpful, as it lays down clear instructions in terms of how exercises should be run so that the sponsoring employer complies with the code.

An examination of the adviser’s vulnerable client policy will show the extent to which it has experience of dealing with members. 

The age qualification can be useful as a broad guide, but having a skilled and experienced adviser dealing with members will provide the protection for vulnerable members.

Members can be classed as vulnerable through recent bereavement, road traffic accidents as well as the more obvious issues such as hearing or sight impairments.

Allowing members to call at the adviser’s offices, or in extreme cases to be visited at home, can enhance understanding, and shape the recommendations to members according to their circumstances.

The issue for trustees is that it is not possible to identify potentially vulnerable clients – other than through the age qualification – until some sort of contact has been made.

Our experience is that some fit and healthy members over the age of 80 will have a firm grasp of the longevity risk and the inflation risk of accepting a Pie offer, whereas there may well be members that fit the standard criteria but would not be deemed as being able to make an informed decision.

Jonathon Webb is a director at JLT Wealth Management