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Time to look
at survivors' pension provision

In his latest blog, Tony Bacon considers the impact of a recent Supreme Court ruling on survivors’ pensions and outlines how sponsors and trustees may need to review the provision of their schemes.

The Supreme Court’s decision, see our News Alert last month - in the Brewster local government case got me thinking (actually, we think about this a lot as will be apparent) about the survivors’ pensions provided by DB pension schemes, that is pensions payable to partners and other dependants of former employees who die with a pension entitlement. 

In many cases, private sector scheme rules provide for these benefits to be granted on a discretionary basis where the survivor was not married to or in a civil partnership with the member. In light of Brewster – and bearing in mind that more and more households are headed by unmarried couples (3.3m in 2016 compared to 1.5m in 1996 according to the Office for National Statistics, as well as about 76,000 same sex couple headed households) - I suggest that scheme trustees and sponsors should now review the terms of their schemes and the processes by which these benefits are provided.

Until 1978 there was no requirement for private sector pension schemes to provide pensions to the partners of deceased scheme members. From April 1978, contracted-out schemes had to provide limited widow’s pensions.  This was extended to widowers in 1988 and, from 2005, to civil partners of deceased members.  In each case, the new requirement only applied to a limited extent – and  a potentially very limited extent for same sex partners as is currently in court - although many schemes voluntarily went further than statute required.

Over the years and in response to changing social trends many private sector DB schemes have moved to provide survivors’ pensions to unmarried partners on a discretionary basis. That is, if a member dies leaving an unmarried partner then, subject to meeting certain requirements, the trustees might think about awarding a pension.

As can be seen, the extent to which partners of deceased members might claim entitlement to a pension is subject to the vagaries of the courts, legislators and possibly random scheme rule drafting decisions years or decades ago.

Most schemes also have a provision that permits them to reduce the partner’s pension if the survivor is considerably younger than the member. This was designed to protect schemes from having to provide lifetime survivors’ pensions to very young spouses, perhaps where their relationship with the former member had lasted only a short time.   Again, this provision is often a discretionary one.

So what should scheme sponsors and trustees do, bearing in mind these uncertainties? Before any legal traps open up I suggest that trustees and sponsors should conduct a review of their scheme’s provisions for survivors’ pensions.  Here are some suggestions of things to think about:

  • What benefits do the rules currently provide for, both automatically and on a discretionary basis?
  • Are the current provisions and processes for deciding on entitlement appropriate and compliant with equality law? And are they likely to stay so?
  • What allowance is made in transfer value calculations for survivors’ benefits? Is this consistent with likely experience, given the scheme’s provisions?

As employers look for ways to manage their pension scheme liabilities and society moves towards ever greater equality, the provision of survivors’ benefits is likely to come under greater scrutiny in future.

Learn more about how our Online Governance System can help you make quicker and better decisions on general scheme and investment issues here.