Defined Benefit (DB) Pensions

• Topic 01

  Defined Benefit (DB) Pensions

  43 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What is a 'dependant's pension' in the context of a DB scheme, and who qualifies to receive one?

   • A
     A dependant's pension is a continuing pension paid to a spouse, civil partner, or financial dependant after a member's death; the scheme rules define who qualifies, typically including spouses and those financially dependent on the member
     Correct answer
   • B
     A dependant's pension is the member's own pension which is enhanced because they have financial dependants at retirement
   • C
     A dependant's pension is paid only to biological children of the member until they reach age 18
   • D
     A dependant's pension is a pension the member retains after taking early retirement on grounds of dependency
   Explanation

   A dependant's pension is a pension paid from the DB scheme to a qualifying person after the member's death. Most DB schemes define 'dependants' to include spouses, civil partners, and sometimes cohabiting partners (who were financially dependent on the member) as well as dependent children. The exact definition varies by scheme rules. The key principle is that the dependant's pension provides a continuing income to those who relied financially on the deceased member.

2. A DB scheme has a surplus of 15% over its technical provisions. The employer proposes to take a 3-year contribution holiday and distribute the remaining surplus to shareholders. The trustees object. Which of the following best describes the trustees' powers in this situation?

   • A
     The Pensions Act 2004 requires a 10-year contribution holiday before any surplus can be distributed to shareholders
   • B
     Trustees have no power to block a contribution holiday or surplus distribution — these are employer prerogatives
   • C
     Trustees can refuse to consent to a surplus distribution if the scheme rules require their consent; they can also object to a contribution holiday if it risks compromising the scheme's funding position
     Correct answer
   • D
     Trustees must approve both actions automatically if the actuary certifies the surplus exists
   Explanation

   Trustees have fiduciary duties to members and have powers under the scheme rules to protect member interests. Many scheme rules require trustee consent for surplus distributions. Trustees can withhold consent if they believe the distribution or contribution holiday risks future funding adequacy. TPR also oversees the funding position and can intervene if it believes members' interests are at risk. Trustees do not merely ratify employer decisions.

3. What transitional protection applies to members with a protected pension age of 55?

   • A
     Members can elect to retain a pension age of 55 by notifying HMRC at any time before April 2028
   • B
     Protected pension ages of 55 apply only to public sector workers and not to private sector DB scheme members
   • C
     Members of schemes that had a protected pension age of 55 on or before 4 November 2021 can retain access to benefits from age 55, even after NMPA rises to 57 in April 2028
     Correct answer
   • D
     The transitional protection gives members 5 years after April 2028 to phase into the new 57 age requirement
   Explanation

   Finance Act 2022 provides transitional protection for schemes that had a protected pension age of 55 under their rules as they stood on 4 November 2021. Members of such schemes can continue to access benefits from age 55 after April 2028, subject to conditions about the scheme's rules and any subsequent transfers. This protects members who had a reasonable expectation of early access.