Having read numerous articles about the pros and cons of traditional
with-profits funds with their attaching guarantees, we have come across two
cases where the attaching guarantees and the very nature of the contracts
have put our clients at a potential and significant material disadvantage.
In both cases, each client was a member of an executive pension plan. In
both cases, the members had left that employment and in one of the cases
the previous employer is no longer in existence.
The clients' salaries are effectively set in stone at date of leaving, as
is their service, which has obviously come to an end. Therefore, under
occupational pension scheme rules, there is a maximum pension that can be
paid from this contract.
However the guaranteed sum assured and attaching bonuses, at normal
retirement age, will provide a fund potentially significantly greater than
that allowable under Inland Revenue rules. Any surplus would go back to the
previous employer – no longer in existence in one case.
The alternative would be to consider a transfer to a personal pension
subject to overfunding checks at point of transfer.
But in this particular case, the transfer value on offer is £34,600.
The guaranteed sum assured and attaching bonuses so far are about
The ultimate fund at retirement is likely to be significantly in excess of
this as no doubt there will be further annual bonuses and a terminal bonus.
The client is therefore in a no-win situation as the transfer away from
such a contract would be prohibitively expensive and unjustifiable. Should
our client sit and watch the inevitable overfunding occur or suffer
substantial financial penalties?
We have written to the insurance companies concerned to ask whether they
would consider – assuming that they keep the existing funds and no
alterations are made to the investments whatsoever – amending the
documentation from an EPP to a PPP as part of an internal transfer at no
cost to the clients.
It would appear that this is not possible and I wonder whether the
companies are either unable or unwilling to accommodate this.
These cases have occurred in quick succession and cannot be isolated
I note that the FSA has this week highlighted a number of concerns about
with-profits funds and there will be a review further to the release of a
discussion paper as part of a year-long review of the industry.
There is to be an open meeting on June 18 to discuss these issues. Perhaps
the FSA could ask insurance companies to look at these situations as such
contracts do not sit well with current flexible employment practices.
Financial planning manager, Kingsway Financial Services, Wrexham