Pension increase exchanges are employer-led exercises, but there is nothing to stop trustees playing their part to help members get a fair deal, says Linklaters' Phil Goss.
Most commonly, Pie exercises are proposed by employers and are very much employer-led. This is particularly the case where Pie is offered as a one-off option for a limited period.
Action points
Engage with the employer to understand the proposals
Check whether the adjusted benefits can be administered and whether a rule amendment is required
Review the draft communications to members to ensure the trustees are broadly comfortable
The alternative approach is to introduce a Pie as a standing option within the scheme that members can opt to take at retirement.
By its nature, such an approach is likely to involve greater trustee input as the Pie becomes a permanent benefit option within the scheme.
In either case, trustees typically prefer to have minimal involvement in Pie exercises. However, there is still a role for them to play.
Key considerations
Communication is often the most significant role for the trustees. Although the communication to members will likely be from the employer, trustees should carry out at least a high-level review to ensure that they are clear and that any references to the trustees are appropriate.
Next, trustees should ask whether an amendment to the scheme rules are required, or whether the existing rules are flexible enough.
It is likely that trustee consent will be needed if a rule change is required.
Trustees will also need to ensure they understand the scope of the proposed benefit changes, and consider whether they are comfortable with those proposals – for example, whether the spouse’s and dependant’s pensions will be impacted by a member taking up the Pie option.
If so, would the consent of the spouse or dependant be required? From a legal perspective, spousal consent is not strictly required.
However, there is a degree of practical risk of challenge if their consent is not sought, so trustees will likely want to take advice on this.
It is also important to think about the value of the offer, which will be determined by the employer. It is possible that the value of the higher starting pension will represent less than 100 per cent of the value of the original increasing pension.
While this is essentially a benefit design issue for the employer in planning the exercise, it may impact on the extent to which the trustees are willing to be associated with the offer.
A practical question for the trustees to consider is whether they can administer the Pie-adjusted benefits as proposed within their current systems. Any concerns will need to be flagged to the employer.
Code of practice
Trustees should be mindful of the code of practice that was published in 2012 by the industry working group on incentive exercises.
The code says it is the employer’s role to assess the Pie and comply where necessary, and while the trustees do not need to duplicate the checking process, they may wish to ask the employer for confirmation that the exercise is above board.
Trustees also need to consider the role they will play in implementing the offer. For example, will all communication be between employer and member, until the trustees are informed of the level of benefits to pay?
Or will trustee involvement be required at an earlier stage, such as amending retirement packs to include details of the Pie option?
These points will require discussion with the employer.
Trustees do not need to be heavily involved in a Pie, but they should be willing and able to work alongside the employer to help ensure the best outcome for members.
Phil Goss is a senior pensions lawyer at Linklaters
