Pension Trustee Responsibilities Series Article 1: Death of a member prior to retirement

June 4, 2024

A pension trustee has overall control of the assets placed into a pension scheme. It must also ensure the scheme satisfies the legal and regulatory requirements of its operating jurisdiction and operates in compliance with the scheme’s trust deed and rules.

Where scenarios arise that are not specifically covered by the scheme’s Trust Deed and Rules, the pension trustee is required to exercise discretion.

This series of articles, co-authored by John Batty (Boal & Co Technical Manager), and Ben Hughes (pensions lawyer at Keystone Law), delves into the pension trustee’s world, exploring different scenarios and how they might be addressed by a pensions trustee exercising their discretionary power.

In this first scenario, we discuss the death of a member prior to their retirement.

The Scenario

A member of a company’s defined contribution pension scheme has died prior to retirement. There is a fund of approximately £300,000 in the member’s name within the pension.

What should the trustee do?

First and foremost, the trustee must understand the benefits available under the scheme rules as these will frame the options available and may also inform what further information should be sought. Careful review of the rules is critical as if a trustee fails to consider all options available to a member, it can amount to maladministration.

From an administrative perspective, the trustee must also evidence the member’s death and consider what arrangements (if any) the member had made, such as a letter of wishes. The date of any such letter is a relevant consideration (generally the more recent, the better). However, a letter of wishes will not typically be binding. Therefore, the trustee would also usually want to see a copy of the member’s will and source relevant information regarding other potential beneficiaries that fit within the range defined by the scheme.

What should the trustee do next?

Having ascertained what benefits are available under the scheme, the trustee will have an idea of the powers they have in respect of the provision of benefits. It may be that the scheme is quite prescriptive. However, where there is no direction from the scheme’s rules, the trustee will usually have discretion over what type of benefit to pay, who the benefit may be paid to, and how much that individual should receive, with the letter of wishes being a starting point in this regard. This may require some due diligence which should be handled sensitively and carefully, particularly if individuals are grieving.

In terms of deciding what form and level of benefits to provide, this should take account of any applicable tax limits. If an income is to be provided, the trustee will need to determine the best way to provide that. If a lump sum is to be paid, this will usually be more straightforward to administer.

However, in coming to a decision, the trustee should be certain that decisions made are a reasonable exercise of any discretion they retain. This might require advice depending on the complexity of the circumstances and the decision-making process should be properly documented.

What are the tax implications of paying a benefit?

Bringing a benefit into payment will usually have tax consequences. The trustee should ensure that any pension and/or lump sum(s) paid are subject to the appropriate deduction of tax and are within approvable limits. The application of tax will depend on the classification of the scheme and the nature of the benefit, as well as the legislation the pension scheme is under. Finally, the payment of benefits will usually trigger notice requirements. Again, the combination of technical provisions may mean it makes sense to take advice when initiating a benefit payment.

What other considerations / actions that should be taken?

There are ancillary considerations when administering a death benefit. These touch upon a variety of topics such as investment (moving funds into cash or maintaining investments); ensuring that beneficiaries are communicated with properly; and making sure benefits are paid in a timely fashion. Generally, death benefits need to be paid promptly and no later than two years after the member’s death (but this will depend on the scheme and circumstances). In addition, non-pension considerations will arise such as ensuring AML regulations are followed.

Any other tips for managing death benefits?

In many ways, the good administration of death benefits often stems from a well-prepared membership. Ensuring that letters of wishes are updated following changes in member circumstances will avoid potentially complex and time-consuming due diligence further down the track. It will also help to ensure that members think about, and are happy with, the benefit provision they are making for any surviving beneficiaries - an important but often overlooked consideration.