There has been a significant increase in the number of pension schemes carrying out trivial commutation exercises since the Budget, reports Xafinity, as schemes look to de-risk and save costs.
Last year’s Budget saw a large rise in the thresholds at which a member can exchange a ‘small’ pension for a cash lump sum – a process known as trivial commutation. In particular, the single pot limit was increased from £2,000 to £10,000 and the maximum value of total pension benefits that can be trivially commuted increased from £18,000 to £30,000. Furthermore, the age at which trivial commutation is permitted is reducing from age 60 to age 55 in April this year.
In some schemes, this means that as many as 25% of members over age 55 will potentially be eligible to trivially commute their benefits. For large schemes, this can translate to thousands or even tens of thousands of members. Across the pensioner population alone in occupational defined benefit pension schemes, there are over 4 million members meaning up to 1 million of those could be eligible.
Independent research commissioned by Xafinity also suggests significant member appetite for trivial commutation with 83% of individuals surveyed indicating they might be interested in commuting a pension of £10 per week for a £10,000 lump sum. This high level of interest is supported by actual experience with average take-up rates of c. 65% based on exercises carried out by Xafinity.
David Harvey, Xafinity said:
“Pension schemes are viewing trivial commutation as a natural first step in the journey planning process. In particular, these exercises provide schemes with an opportunity to reduce the disproportionately high cost of administering small benefits as well as benefiting from an improvement in the scheme’s financial and risk position. Whilst simple in concept, there are a number of issues that need to be considered in the design and implementation of any exercise. In addition, providing member support through a variety of mediums is vital to ensure members are able to easily obtain the information they need to make an informed decision.”
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