With more employees than ever signing up to company pension schemes thanks to automatic enrolment, increasing numbers will be entitled to the associated death-in-service benefits. As a result, HR teams need to urgently rethink their approach when providing employees with information and guidance regarding these benefits. Matthew Hansell of Mills & Reeve provides some tips for employers.
When employees join death-in-service benefits schemes, they are required to nominate who will benefit on their death. Often, employers will provide guidance to employees at that initial stage and then when the employee is retiring, but rarely provide ongoing reminders about the need to keep these nominations under review. Unfortunately, this can have disastrous consequences.
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The XpertHR Benefits and allowances survey 2013 looked at what workplace pension benefits, including the levels of death-in-service benefits, employers offer.
This was illustrated in a recent case before the Pension Ombudsman that involved a father of three, Mr S, who died in service. Mr S was divorced and had three children from his first marriage, who he had not been in direct contact with for several years. His second wife had four children of her own from a previous marriage, all of whom were financially dependent on Mr S.
The couple had created mirror wills leaving their estate in trust for their seven children, split 80:20 in favour of her four children. But Mr S had not updated his nomination form following his divorce and remarriage, so the company pension trustees followed his original nomination and paid the death benefits to his three children. No provision was made for Mrs S or her children: she was far from happy with the situation and complained to the Pension Ombudsman, but they upheld this decision.
Problems such as this can be avoided if HR teams prompt employees to review their nominated beneficiaries regularly. One solution open to Mr and Mrs S, for example, would have been to set up a discretionary trust.
Discretionary trusts are flexible and can be used to benefit a wide range of individuals, including unborn children. But there are a number of other benefits, including that trustees of the pension funds have two years in which to pay out funds. This means that if there is conflict between relatives making claims and the deadline is looming, it gives reassurance that funds are passing into a protected environment while the conflict is resolved. It is also a tax-efficient method of passing funds down the family line and provides asset protection.
Another recent example involved a company director, Mrs J, who passed away after a short illness. She was divorced and left a daughter, aged 16. Luckily, in this case when Mrs J became ill her employer recommended she look into her pension lump sum and death-in-service benefit. A solicitor reviewed her will and prepared a lifetime discretionary trust, together with two nomination forms addressed to the pension trustees requesting her employment benefits on death and pension pass into the trust. The trustees of the discretionary trust were able to ensure that the funds were invested to provide Mrs J’s daughter with an income going forward and a sufficient lump sum to enable her to fund her studies.
Keeping up with the times
Providing benefits for employees is only the first step for HR departments. If nomination forms are allowed to go out of date, or if employees do not complete the forms, this can also lead to a whole host of problems for the pension trustees, including:
- the need to undertake the lengthy and often difficult process of finding the relatives of the deceased and ascertaining whether or not they meet the criteria of the pension scheme;
- dealing with complicated family relationships; and
- addressing the issues of co-habiting couples and parents.
Top tips for HR teams
All this can seem somewhat daunting for those without a legal background, but if you are providing death-in-service benefits, just remember to:
- provide guidance to employees on making nominations;
- suggest workers obtain professional advice on the options, including setting up discretionary trusts, but make it clear that the employer is not providing legal or financial advice; and
- remind employees to review their nomination forms regularly, at least every three years.