The Pensions Regulator

Pensions Regulator issues guidance on lump sum death benefits

Ref: PN06-24
30 June 2006

The Pensions Regulator has today issued guidance on providing lump sum death benefits.

This sets out under what circumstances lump sum death benefits can be provided for members of occupational pension schemes and where lump sum death benefits can be provided from such schemes in the absence of the provision of pension benefits.

It also clarifies that, following the recent amendment of the definition of 'occupational pension schemes' and section 255 of the Pensions Act 2004 (see editor's notes), group life only schemes are no longer considered to be occupational pension schemes under legislation or for the purpose of regulation by the Pensions Regulator.

Therefore, an employer that did not previously have to designate a stakeholder scheme because a group life only scheme was in place will now have to meet the stakeholder designation requirement. Employers affected should have put a stakeholder scheme in place by 22 December 2005 (three months from the date the amended definition had effect), and must certainly take steps to do so without further delay if they were previously unaware of the position.

Where an employee is offered membership of a pension scheme for pension benefits it will be acceptable for the employee to be provided with lump sum death benefits as part of that package. It does not affect the regulator's view if such benefits are increased or reduced. The continuation of life assurance cover for retired members would also be acceptable.

The guidance also contains example scenarios illustrating situations which may be encountered in practice and explaining how the regulator sees section 255 operating.

If the regulator is notified of any breach of section 255, we will take a proportionate and risk-based approach to this, based on the risks to members' benefits caused by the breach concerned.

To view the document visit: www.thepensionsregulator.gov.uk

Editor's notes

• The regulator's guidance has been prepared in the light of the Department for Work and Pensions' note of 21st February 2006 entitled 'IORP Directive (2003/41/Ec) and the Provision of Death-in-Service Benefits'.
• Section 255 of the Act limits the activities of schemes which have their main administration in the UK to 'retirement-benefit activities'. These are defined as:
  1. operations related to retirement benefits; and
  2. activities arising from operations related to retirement benefits.

  'Retirement benefits' are in turn defined as:

  1. benefits paid by reference to reaching, or expecting to reach, retirement; and
  2. benefits that are supplementary to benefits within paragraph (a) and that are provided on an ancillary basis:
     1. in the form of payments on death, disability or termination of employment; or
     2. in the form of support payments or services in the case of sickness, poverty or need, or death.

  In any areas where the interpretation of legislation is in question, the trustees of a scheme may wish to take their own professional advice.

• For more information on stakeholder designation requirements visit: www.thepensionsregulator.gov.uk/
  stakeholderPensions/employers/index.aspx
• The Pensions Regulator is the regulator of work-based pensions in the UK, with wide-ranging and flexible powers under the Pensions Act 2004.
• The powers of the Pensions Regulator include the ability to:
  • collect more detailed scheme information;
  • issue improvement notices and third party notices, enabling the regulator to ensure problems are put right;
  • freeze a scheme that is at risk, while the regulator investigates; and
  • prohibit trustees who are judged not fit and proper to carry out their duties.