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 second scenario in the series, we discuss the diagnoses of a member with serious ill health.
The Scenario
A member of a company’s defined contribution pension scheme, who has not reached the age where he can retire under the rules of the scheme, has been diagnosed with a serious ill health problem. They have asked if they can take early retirement. There is a fund of c £300,000 in the member’s name within the scheme.
What should the Trustee do?
As with death benefits (addressed in a previous article in this series), a starting point for any benefit provision is the rules of the scheme to understand what options are available to the member. If the member is so ill that they will no longer be able to work, it would bring into play the possibility of early retirement on an ill-health pension. If the member has a terminal condition with a life expectancy of less than one year, it may be that the rules of the scheme allow for a commutation of the whole value of the benefit. Furthermore, dependent on the jurisdiction of the scheme and the legislation it is approved under, a tax-free element may apply. There may also be other considerations in play (such as whether the member wishes to apply for a hardship withdrawal to assist with the costs of hospital treatment etc.)
What does the trustee need to do next?
Where early ill health retirement or serious ill health commutation are relevant, it is very likely a medical report will need to be considered to ensure the criteria for providing the benefit under the rules and applicable legislation are met.
Taking account of the medical information received, the trustees (or employer – depending on who makes the decision under the rules) will need to formally decide whether to allow the relevant benefit. In doing so, it is crucial that the decision-maker properly directs itself in terms of:
(a) taking into account relevant considerations
(b) setting aside those that are not
(c) giving appropriate weight to the considerations in play
The final part of the process is to communicate the decision and consider any response from the member before giving effect to the final decision.
Are there any other considerations / actions that should be taken?
It may be that there are nuanced decisions to be thought about in terms of what is in the member’s interests. For example:
(a) how does the taking of an early ill health pension interact with any other benefit provision that is available to the member)?
(b) If a serious ill health commutation is available:
(i) would the member be better off staying on sick leave and potentially receiving a benefit under any life cover in place?
(ii) Would it be preferable for a surviving beneficiary to receive an income post the member’s death rather than a trivial commutation of the whole fund?
(iii) Would it be better for his beneficiaries to receive the pension fund free of tax on his death as opposed to him receiving enhanced income now?
This article has been written in general terms and does not constitute advice. Professional advice should always be sought for your specific scenario.
Read more in this series:
Article 1: Death of a member prior to retirement
Article 3: Investments to be held within a company pension scheme
About Ben Hughes - Pensions Lawyer, Keystone Law
Ben has advised on all aspects of Isle of Man pensions law for more than 20 years. His practice covers the majority of domestic and international schemes in the Isle of Man.
John Batty
Technical Sales Manager
