Unused legislative rule solves trustees drawdown conundrums

It gives defined contribution schemes’ trustees and managers the power to make specified payments — for example, drawdown pension, a short-term annuity or uncrystallised funds pension lump sums — despite any provision of the rules of their scheme (however framed) prohibiting the making of the payment.

The rationale for the power was to ensure, as far as possible, that individuals were not prevented from taking advantage of the pension flexibilities, although in the end the government stopped short of introducing a full statutory override — the power in section 273B is permissive.

Controversially, no employer consent is required to the exercise of the power, even though the range of benefits to be made available from a scheme is fundamentally a question of benefit design, which would conventionally be left to an employer to decide on. 

These cases illustrate that, given the right set of circumstances, section 273B does have its uses

Until recently, I would have said that section 273B was of no practical use, at least in a trust-based scheme setting.

Following the introduction of the flexibilities, sponsoring employers and scheme trustees elected instead to formally amend their scheme’s rules, rather than fall back on section 273B.

In almost all cases, amendments only allowed for the payment of uncrystallised funds pension lump sums, rather than the full suite of flexibilities — those were left to commercially run schemes to offer. 

Now, due to two recent queries from clients, I have changed my mind. In both scenarios, the trustees achieved their aim by using the statutory override.

Dependant’s drawdown pension

The first case concerned a senior executive and member of the company scheme, who had died leaving very significant death benefits.

Under the scheme rules, these would be paid as a lump sum to the beneficiary. However, the beneficiary, at the instigation of their independent financial adviser, asked if the death benefits could, instead, be paid in the form of dependant’s flexi-access drawdown. This would be far more tax-efficient for the member’s family.  

Both the employer and the trustee were keen to help the beneficiary and we were asked if there was a way they could do so.

The scheme did not offer drawdown because of the administrative costs and complexity of operating a drawdown option, but we advised that the trustee could use the section 273B power to allow the death benefits to be designated as available for the payment of dependant’s flexi-access drawdown. 

While the scheme rules did not expressly prohibit such payments, they did so implicitly, because the rules could not be interpreted as giving the trustee the power to provide benefits in the form of drawdown pension.

It was agreed that the trustee would use the section 273B power to allow the beneficiary to designate for dependant’s drawdown pension in the scheme, but only on condition that they immediately transfer their flexi-access drawdown fund to another scheme that did operate drawdown. The employer did not want to introduce a drawdown option by the back door.

In this case, the employer supported the exercise of the power: the trustees would not have chosen to exercise the power if it had not.

Perhaps even more importantly, the trustees had buy-in from the scheme’s administrator. The exercise of the power was documented in the trustees’ meeting minutes. 

Protected pension age

The section 273B power proved useful in another scenario. In this case, a senior employee and member of the scheme had a protected pension age of 50. He was 51.

For health reasons, he was unable to work and needed to start to take his benefits, as they represented his only source of income. However, he had a significant fund and anticipated that his income needs would fluctuate.

Therefore, he was very keen to go into flexi-access drawdown, rather than having to use his fund to buy an annuity.

But, taking a transfer of his uncrystallised funds to a drawdown vehicle would have meant losing his protected pension age, as the transfer would not have met the “block transfer” requirements.

Again, the employer and trustees were very keen to help the member, and again the section 273B override provided a route through the problem.

It enabled the trustees to allow the member to designate his uncrystallised funds in the scheme for drawdown and take a pension commencement lump sum without losing his protected pension age.

It was a condition of the arrangement that he took a transfer of his flexi-access drawdown fund to a drawdown scheme immediately after going into drawdown, but using the section 273B power meant he retained his protected pension age in the new scheme.

These are both quite unusual situations and they each involved very senior employees, which meant that there was a strong motivation to come up with “creative” solutions.

In both cases, the trustees had buy-in from their administrator. However, these cases illustrate that, given the right set of circumstances, section 273B does have its uses.

Nicola Rondel is a counsel at Hogan Lovells