Pensions update – A-Day group life queries

Employers will need to review their group life benefits as a result of the A-Day pensions changes.

Under the new rules, restrictions on death-in-service lump sum benefits to four-times salary will be removed. Instead, the lifetime allowance limit, which will apply to employees’ pensions pots, will also apply to death-in-service lump sum benefits.

Theoretically, this will give organisations much greater flexibility as to how they structure group life schemes. Currently, one of the more popular options is to offer a dependant’s pension along with a lump sum payment.

One alternative is to simply increase the amount payable as a lump sum benefit. Employers could also consider structuring a scheme based on factors such as employees’ length of service or position in the company and removing any link between death-in-service benefits and salary.

But firms will need to ensure that payments do not push staff over the £1.5m lifetime limit. Although this is only likely to affect high earners, when the value of an employee’s pension at the time of their death is added to the lump sum death-in-service benefit, those that have accrued a significant amount in a defined contribution scheme could also find themselves over the limit.

Howard Rayner, group compliance and legislation manager at Canada Life, said that is these instances, employers may need to reconsider their offering. "It’s an issue they’ll have to look at. Doing nothing is not an option but [employers] don’t need to go and redesign their group risk scheme."