Death in service benefits: difficult decisions as trustees

These are calculated normally by way of lump sum multiples of salary. The benefits are provided by an insurance policy for which the employer will pay annual premiums. The policies are taken out by employers but are in fact held under discretionary trusts – so the employer does not own the policy. This is to facilitate the benefits being paid out quickly on any triggering death of a member in service, and outside of the member’s estate – so the lump sum benefits will not count as an asset for the purposes of the calculation of any Inheritance Tax payable by the estate. The employer will typically be the trustee of the scheme and will have the responsibility of deciding on the distribution of the lump sum benefits. That can be the tricky part.

Family circumstances are often more complicated than they seem and it is more common to have blended families and second marriages these days. There are no real precedents here as human relationships are all unique and different. Employers ought to review their scheme documents to make sure that they allow flexibility in the relationships of the employee members – for instance whether common law partners can be included as beneficiaries. Sometimes employers have mislaid their trust documents and in which case they will need replacing. This can lead to issues on a death in service and on a re-broking of the policy, where the employer is looking to move to a more competitive insurer for example. Insurers often ask for proof the trust exists, and so the written trust terms are important!

As trustee the employer may want guidance as to what factors to take into account in its decision making on any death claim:

• What does it mean to take all reasonable factors into account and avoid irrational ones?
• How many enquiries does the trustee have to make of potential beneficiaries?
• What happens when relatives get involved and try and influence trustee decision making?
• Is the expression of wish (often called nomination form) binding?
• What has to be minuted by the trustee?
• What reasoning about the decision making has to be provided to relatives?
• What happens when the beneficiary is under 18 – should a separate trust be established?
• What if the member had a recent relationship and other family members dispute the nature of that loving relationship?

Where the family picture is unclear and there are competing claims for the money, the trustee decision making role can appear daunting. The employer will want to put a proper process together to help decision making and avoid risks and challenges. It is not possible to stop people complaining about these trustee decisions but assistance with the process and decision making can pay dividends, as disputes to the Courts and/or the Pensions Ombudsman can take up management time and cost money.

It is possible to avoid the trustee role altogether and look to provide the benefits through a master trust arrangement, where a professional body acts as trustee. This can restrict the choice of insurance policy (and impact on premiums). Also there are no guarantees the decision making will be perfect – it is just made by somebody else. This may not mean a saving of management time, as employers could still end up having to deal with complaints to some extent.

Death benefits are valuable benefits and employers will want to ensure that the right decisions are made, to reflect the wishes of the deceased member and benefit those in financial need. The trustee role is not complicated but essentially a practical role involving a good dose of common sense. With a bit of professional guidance and support the right decision can be made and everyone can be happy.