Early Retirement

One de-risking strategy which can assist trustees and sponsors to manage their scheme's liabilities, while providing an increased amount of choice to scheme members, is the implementation of an early retirement exercise. The exercise would involve all members aged 55 or over, who are proactively offered the option to start drawing early retirement benefits from the scheme. The benefit payable on early retirement would be reduced, using the scheme's current early retirement factors, to allow for the longer period over which the benefit is expected to be paid. Members would also be invited to commute part of their pension for tax free cash, in accordance with scheme rules and pension legislation. How does an early retirement help in managing liabilities? Schemes are generally funded on a conservative basis, so that there is a very high likelihood that there will be sufficient assets held to pay members' benefits in full. This is a specific requirement following the introduction of the Statutory Funding Regulations. On the other hand, early retirement and commutation factors are generally calculated on a "best estimate", realistic basis. As a result, a profit will usually accrue to the scheme, on the funding basis, every time a member takes early retirement and/or commutes pension for cash. The amount of funding profit to a scheme will depend on how the factors used compare to equivalent factors calculated using the funding basis. Our experience shows that this can be substantial for some schemes. Some second order benefits arising from an early retirement exercise are as follows:
  • the scheme liabilities are reduced on a one-off basis every time pension is commuted for cash - a smaller scheme is inherently less risky and less volatile in absolute terms 
  • pensioner liabilities are normally priced less conservatively than deferred liabilities, therefore the cost of buying out scheme benefits is likely to reduce following an exercise with a reasonable take-up rate.

Contacts: Charles Cowling, FIA Director | T: +44(0) 161 242 5388 | E: charles_cowling@jltgroup.com Robert Dales, FIA Director | T: +44(0) 779 909 4392 | E: rob_dales@jltgroup.com