When a member of a pension scheme leaves service, he must be given an options statement which sets out his relevant rights. Usually the scheme will allow him to leave his entitlements behind or transfer them to another arrangement. If he has not been a scheme member for very long he may be able to take a refund of his own contributions less tax (currently at 20%). Frequently, early leavers may not get around to making any decision on what they want to do with their pension benefits.

Where the entitlements are 'left behind' in the scheme this may have a direct or indirect ongoing cost for the employer. If the scheme is a defined benefit scheme, there may be ongoing funding issues to address as well as the implications of Financial Reporting Standard 17 in the sponsoring employer's accounts.

The running costs in administering the deferred members' benefits also must be considered. There is also the ongoing latent headache of a change of address not being notified to the trustees, which makes it difficult to keep in contact with the deferred member. This is a practical issue which can store up future problems for the member and the trustees alike. It is probably the single biggest reason why some trustees are considering adopting a policy of transferring out members with low-value benefits.

Where a pension scheme has more than 100 members it is not a small scheme and accordingly has a higher compliance level. Deferred members must be counted along with active members of a scheme when calculating the number of scheme members.

Deferred members do not have any right to be supplied with an annual benefit statement or to be notified of the scheme's annual accounts but they can ask the trustees for a benefit statement or a copy of the accounts. If the member has been transferred to a product with an insurer he will be given information about his investment directly in accordance with the terms of the particular product.

Some employers do not want to have any lingering connection with their former employees even via the pension scheme that is separately held and managed by its trustees. They consider that the pension scheme is a vehicle to attract and retain employees but recognise the need for it also to deal with pensioners' benefits. Those employers prefer if early leavers' pension benefits are transferred out of the scheme on leaving service.

Other employers have a more holistic approach and consider that deferred members have earned their benefits and require the same level of support as active members and pensioners. Such employers believe that this type of attitude on their part will be recognised by the workforce in general and that this, in turn, is an influencing factor in recruiting an retaining employees.

Some employers may wish to encourage their trustees to transfer out deferred members of the scheme to a paid-up arrangement in order to lessen the regulatory and financial burden on the scheme.

But transfers out are a matter for the trustees alone to consider. If the workforce has a high turnover, it may be that the number of deferred members is high in comparison to active and pensioner members. Trustees ought as a matter of good corporate governance to consider from time to time the position of their deferred members and whether it is appropriate to seek to transfer their benefits out of the scheme.

Trustees may be authorised under their deed to make such transfers and may have a general policy to transfer out deferred members, especially if they were in the scheme for less than two years. However, this may not be feasible if the member has two or more years' membership in the scheme and is entitled to a 'preserved benefit' under the Pensions Act 1990. Preserved benefits can usually only be transferred out of a scheme with member consent unless the value is less than €10,000 or if the Pensions Board gives consent.

To apply for Pensions Board consent various hurdles need to be met and it is quite a complicated procedure. The member must have left service more than two years previously. The trustees must have sought his consent for the proposed transfer. They must have sought and provided to the member all the information which a member might reasonably consider to be material to a decision on whether to agree or to oppose a transfer. Under trust law principles, the trustees must also have selected what is, in their opinion, an appropriate transferee product and be authorised to make the transfer under their deed.

If the scheme is defined benefit and is running a deficit, no transfer out without member consent may be made because in those circumstances the trustees would usually be expected to reduce the transfer out payment to reflect the scheme's rate of deficit. From a policy perspective it is clear that the relevant regulations were not extended to give the Pensions Board any role in waiving the need for member consent presumably because the future funding position of the scheme might improve.

In deciding to waive consent, the Pension Board will take into account whether or not the member refused to consent or just did not reply to the trustees' request, as well as any representations that the member has made. To give its consent the Pensions Board had to be of the view that "a reasonable member acting in his or her own best interests and those of his or her dependants would agree to the transfer". Clearly, before the trustees apply to the Pensions Board, they ought to e of the view that this test is met.

For each pension scheme the facts will be different and will constantly vary and its scheme trustees ought to keep this issue under regular review. Trustees should review the level of deferred members on a regular basis and seek professional advice as to the best way of dealing with such members in the overall context of the scheme.

For further information please contact Fiona Thornton.

Spring 2008.