A PUMP scheme
A PUMP scheme can be a partly unfunded money purchase scheme or a partly unallocated money purchase scheme. It depends on whether the sponsoring employer carries some of the unfunded liability on its balance sheet or makes payments to the scheme on an unallocated basis. Essentially it can PUMP money into the scheme as and when.
Benefits
If employees stay in service until their vesting age, they may leave service and receive full target benefit - a lump sum calculated as salary times 20% times length of service with no cap on service (currently enough to secure a non-escalating, joint-life pension in excess of 50%).
On leaving before vesting age, only a lump sum equal to the member's allocated account is payable (increased at employer discretion).
Vesting age is the age, e.g. 65, at which employees are entitled to the full target benefit, conditional on service terminating.
The lump sum on leaving may be used in any way permitted by HMRC.
Vesting age is set by the employer. Employees may be granted different vesting ages. Vesting age may be retrospectively increased for anyone more than five years younger than the vesting age. Vesting age is also a minimum period, e.g. five years, from the first day of service.
On death in service the scheme will pay out a lump sum equal to the full target benefit at vesting age based on salary at date of death, less the member's allocated account.
Allocated accounts
Employees contribute 5% of salary, which immediately goes to their allocated account. The employer is liable for the full target benefit only after vesting age, less anything in the member's allocated account.
An allocation committee meets periodically to determine:
- Whether holding the unfunded liability on the balance sheet is sustainable until the next review;
- Whether any potential liabilities should be taken off the balance sheet by making a contribution either to members' allocated accounts or to an unallocated employer's account within the scheme;
- How much, if any, money should be distributed to members' allocated accounts either from the employer directly or from the unallocated account.
Employees may borrow from their allocated account subject to a minimum remaining in their account.
Comments
A PUMP scheme is more affordable than current models due to the early leaver cross-subsidy. A potential increase in liabilities (due to an ageing, long-staying workforce) can be funded through an unallocated account without necessarily losing the funds to members' accrued rights.
It is completely flexible - an employer may accrue a short-service liability for an older worker on its balance sheet, which may form only a fraction of its turnover, or reward a high-turnover workforce with allocated contributions.
The allocation committee is not just responsible for funding sustainability, but for reward and remuneration, as placing funds into members' allocated accounts represents the award of a deferred bonus. The committee is otherwise responsible for governance and appoints a scheme manager to invest the allocated member accounts and the unallocated employer account.
On employer insolvency the allocated member accounts are given to the members. The scheme structure may provide for any unallocated employer account to be distributed to members or form part of the employer's assets.
This is a better outcome than the Pensions Act 2008 minimum because it rewards long-serving employees with a greater pension, provides the opportunity for bonuses to be paid not as cash but as pension, removes investment risk and investment decisions from employees, and still provides early leavers with an equivalent money purchase benefit.
Gavin Moffatt & Robin Hames
Bluefin Corporate Consulting
Keywords: gavin, moffatt, gavin moffatt
