Kingfisher puts trivial commutation on ice to focus on member data

Sponsors of large private sector schemes have been taking measures to derisk their liabilities in recent months in an effort to tackle ever-growing deficits, with some using the April flexibilities as an opportunity to get low-value members off their pension scheme balance sheets.

For example, Invensys pension scheme announced in January that members aged over 60 and from April 1 those over 55 with less than £10,000 in pension entitlement will be allowed to receive their pension pot as a one-off lump sum via trivial commutation.

However, Dermot Courtier, pensions manager at Kingfisher Pension Scheme, said that while a trivial commutation exercise would enhance the scheme's ability to manage costs, it would only consider such an exercise after first improving the quality of member data.

“The most important aspect of planning for such a derisking option would be looking at the data and the cleanliness of the data,” said Courtier.

The most important aspect of planning for such a derisking option would be looking at the data and the cleanliness of the data

Dermot Courtier, Kingfisher

Last year’s Budget saw a significant increase in the threshold at which members can exchange a smaller-sized pension pot for a cash lump sum, with the single-pot threshold rising to £10,000 from £2,000, and the maximum for up to three pots rising to £30,000 from £18,000.

The option to commute benefits is available to members aged over 60, but from April 6 will be open to members over 55.

Courtier said: “We would obviously also need to look at developing a communication program that segmented and targeted the audience and we’d be talking of deferred members aged 55-plus going forward in the new pension environment.”

However, Mike Smedley, partner at consultancy KPMG, said the Budget changes had altered the concept of trivial commutation, given people will soon have access to their entire pot.

“The concept of trivial commutation is not necessarily irrelevant but different. It’s not just about small pensions, everyone is looking at their options post-Budget.”

Paul Darlow, head of proposition development at consultancy Xafinity, said a key challenge for schemes will be members fully understanding the options available to them and the impact of tax.

“There are some complications particularly around the tax treatment of trivial commutation,” he said. “A lot of members need support in understanding what that tax treatment actually is so they can decide whether or not it’s something they’re interested in.”

Member appetite on the rise

According to research by Xafinity released last week, a high proportion of members with smaller pots would consider commuting their pension savings and taking a lump sum.

More than eight in 10 (83 per cent) individuals surveyed indicated they would consider commuting a pension of £10 a week for a £10,000 lump sum.

Xafinity questioned 1,000 pension scheme members aged over 55 with varied pot sizes and across a spread of income levels.

Darlow said one of the interesting things that came out of the research was that members were significantly more receptive to the idea of commuting their pension when presented with a value of the lump sum they might receive.

“If you put numbers on it members are much more interested. Members tend to underestimate the value of their pension benefits,” said Darlow.

The broad 20:1 multiple for cash entitlements available through trivial commutation means a £500-a-year pension at age 65 would be worth £10,000.

Speaking about the Invensys scheme last month, the government’s older workers’ champion Ros Altmann said a near-equivalent joint-life annuity in the market could cost more than £16,000.

“From a member’s perspective, the deal is not financially or actuarially attractive. However, emotionally and in practical terms many members may be very attracted to it,” said Altmann.