The Rexam Pension Plan has carried out a trivial commutation exercise, contributing towards a reduction in total membership as defined benefit schemes are trying to reduce costs.
Trivial commutation enables members to swap their regular pension payments for a one-off cash lump sum, provided their pension is relatively small.
At the £2.2bn Rexam Pension Plan, the number of total members dropped to 19,188 from 20,488 between 2015 and 2016.
According to the scheme, this reduction in membership “includes 600 pensions commutations arising from the completion of a trivial commutations exercise”.
It’s important to keep a note of who you have paid out. Sometimes members forget that they have been fully paid out and come back at a later date asking for their benefits again
Alex Waite, LCP
Cashing in
Rexam, a drinks can manufacturer recently acquired by Ball Corporation, is not the only company to have carried out such an exercise.
Last year, the £10.5bn Mineworkers Pension Scheme commenced a commutation exercise, and about 12,500 members had chosen to commute their benefits by March 2016, while at the BT Pension Scheme, 290 benefits were transferred out and trivially commuted during the year ending June 2015.
Tyron Potts, associate and head of pensions research at consultancy Barnett Waddingham, said cashing in a small pension can be appealing to members who may prefer a modest lump sum to a small monthly income.
Reducing admin costs
The exercise is not just in the interest of some members. Potts said: “There is an ongoing cost associated with administering a pension payable from an occupational pension scheme.”
"This can be disproportionate for smaller defined benefit pensions for example, and so long-term cost savings can be made if members will consider a lump sum in lieu of their small pension," he said.
Reducing headcount can also have an impact on per-member levies, such as the Pension Protection Fund administration levy, said Potts.
And if a scheme is planning to buy out members’ benefits, “then a trivial commutation exercise can reduce the number of relatively expensive and difficult-to-insure cases, leading to savings and avoiding the... pitfalls with buying out small benefits,” Potts added.
Claire Bell, partner at law firm DLA Piper, said carrying out a commutation exercise can result in “a reduced compliance burden because you’ve not got as many people in the scheme”.
Before carrying out a commutation exercise, “you need to look at your membership profile and carry out a cost benefit analysis to establish whether it is actually worth doing”, said Bell. This is because some schemes may only have a handful of people eligible to cash in a small pension.
Alex Waite, a partner at consultancy LCP, said that when it comes to commutation exercises, “communication is key” because “members need to fully appreciate what they are giving up”.
Trivial commutation legislation
In March 2014 pension legislation changes increased the limit for trivial commutation lump sums to £30,000 from £18,000.
In April 2015 the age limit for taking a trivial commutation lump sum was bumped down to 55 from 60.
In September 2016 the government relaxed the rules so trivial commutation lump sums can be paid from money purchase benefits in certain circumstances.
He also stressed: “It’s important to keep a note of who you have paid out. Sometimes members forget that they have been fully paid out and come back at a later date asking for their benefits again.”
GMP uncertainty
Alexandra Morton, associate at law firm Squire Patton Boggs, said there is a current area of uncertainty for trustees with regard to commutation of guaranteed minimum pensions.
Where a member has a GMP and their benefit is being commuted for a trivial commutation lump sum before GMP age, which is 65 for men and 60 for women, “changes to legislation introduced on 6 April 2016 have caused uncertainty,” said Morton.
She said that previously, the GMP had to be notionally revalued from the period of leaving contracted-out service up to GMP age for the purposes of deciding whether a member's benefits fell within trivial commutation limits.
Commutation conundrums not so trivial
From the blog: Most pension schemes are considering derisking and most of those are considering trivial commutation.
If they did fall within those limits, the pension plan's rules would determine the actual lump sum payable. Since new regulations came into force in April, apparent changes would create an inflated trivial commutation value, she explained.
Morton noted that the government considers there was no intention to change the calculation and that it is unclear whether this issue will be clarified formally in regulations.
“Trustees are therefore in a difficult position, not knowing how they should calculate trivial commutation of GMPs where this is permitted before GMP age,” she said.
