Cash Commutation Decisions and Useless Statistics
29th November, 2012
£2-3 billion is purportedly the money DB members could be losing in poor cash commutation terms according to industry commentators.
There are many question that members can consider when deciding whether to forego pension for cash. It is possible to drill these down to include pension increase levels, tax savings and the like but the main consideration for most is what is the opportunity cost of not taking a lump sum.
The points on which Trustees could deliberate are no less numerous but they basically collapse into the same old two questions:
1. What do the rules say?
2. What is in the interest of the Scheme beneficiaries as a whole?
The rules will advise whether members have a right to swap pension for cash or whether it is an option provided at the discretion of the Trustees. Similarly the Rules will provide who has the power to set or alter the commutation rates.
When agreeing commutation rates, normally in consultation with the Scheme Actuary, the Trustees ultimately have to be comfortable that they are not allowing cash to exit the Scheme at such a rate that it would increase the risk of other members not getting their benefits. It is prudent for the Trustees to consider their discretions on commutation, early/late retirement and transfer values as part of each valuation. The general aim should be for any such event to have a neutral impact on the Scheme.
Regardless of the conversion rate in place, the Trustees primary obligation must be to ensure that members have the correct level and type of information to make their decision. Statistics like this don’t help.