Any other business: Illness is an unconventional path to a pension transfer. But for the thousands of employees every year rendered unable to work through sickness, surviving financially through the mercy of an early pension might make all the difference.
The ill health pension is not simple. Different criteria apply across the schemes that offer it, and most schemes grade the benefits on offer in accordance with the medical condition of the recipient.
They are the most expensive type of benefit a trustee can provide to a member
Dan Taylor, Trafalgar House
Trustees are charged with the delicate task of assessing medical evidence before deciding whether to transfer large sums to vulnerable individuals.
The trustees are then responsible for reviewing the condition of the ill health pension beneficiary periodically.
The most expensive pension
The pressure of delivering an ill health pension in appropriate measure is compounded by its cost to the scheme.
Dan Taylor, client director at administrator Trafalgar House, said: “The main problem with them is that they are the most expensive type of benefit a trustee can provide to a member, because they’re often on enhanced terms [and] members can take them before the statutory minimum retirement age.”
Where a member’s life expectancy is deemed to be less than 12 months, the pension can be transferred out as a full lump sum.
In all other circumstances, trustees must periodically review the ill health arrangement and the individual’s ability to work. Schemes typically have two or three tiers for their ill health pension.
“If they can return to work… they can suspend the pension, they can stop paying it on the ill health basis, they can revise the ill health pension [by removing the enhancements],” according to Taylor.
Accounting for lost years of employment
Evidently, calculating the ill health pension is an onerous task. Rules vary across schemes, but according to Rhidian Williams, partner at Quantum Advisory, there are two aspects to the ill health pension that make it so costly.
“For a member perhaps retiring due to ill health, retiring early, that pension is not reduced,” he said.
Secondly, schemes “may actually allow, particularly for a member who is in active service, for those lost future years of service. So they’d get a credit, perhaps part of the period to normal retirement, or even the whole period to normal retirement age... into that calculation,” he added.
This can have a particularly weighty impact on the value of an ill health pension if the member is at a young age, according to Williams.
Communication is key
The sensitive nature of assessing an ill health pension cannot be understated. Handling the medical details of scheme members will become even more burdensome with the enforcement of the General Data Protection Regulation in May 2018.
GDPR will place additional scrutiny on the handling of data by organisations across the European Union.
Communicating this data effectively between the scheme trustees and the member’s general practitioner is an essential part of the process, according to David Brown, client director at professional trustee company PTL.
Schemes can reap benefits of staying in touch with retired members
Any other business: From crosswords to competitions, there are a variety of ways in which trustees can jazz up their newsletters to retired members, but how much communication with the pensioner population is actually necessary?
Brown emphasised the importance of having a “very, very clear questionnaire that goes to the GP, to actually help the GP give you the information you need as trustees to make a decision”.
Engagement with members is also important, given the variance across schemes in policy towards ill health pensions.
“A lot of this is legacy that’s been written into rules from years gone by… recognising that the ability to simplify that across schemes is quite limited, then communication becomes really, really key,” Brown said.
