There has been much talk surrounding pensions changes lately, following the 2014 Budget and the recent Queen’s Speech. One of the most controversial changes is the potential ban on the transfer from Defined Benefit (DB) schemes to Defined Contribution (DC) schemes. It has already been decided that for public sector pension schemes, most of which are unfunded, the Government intends to introduce legislation to remove the option to transfer from a public DB scheme to a DC scheme, except in “very limited circumstances”. Consultation on the Government’s paper ‘Freedom and Choice in Pensions’, which looks into DC changes and what action to take regarding private DB scheme transfers, has now closed.
Why the sudden urge to transfer?
There is no doubt that the Queen’s Speech left one thing clear, namely that DC scheme members, and only DC scheme members, will soon have much greater flexibility when it comes to their pensions. Anyone aged 55+ in a DC scheme will have the option to take their entire fund as cash, subject to tax, which is expected to come into force by next April.
In light of this, imposing a ban on DB to DC scheme transfers may be seen as unfair on DB scheme members, as they should be able to exercise freedom and choice when it comes to deciding issues, such as what they would like to happen in regards to their pensions.
Although the current poor funding level of many DB schemes could act as a deterrent for transferring, it is thought many members are inclined to accept a reduction in their transfer value, as a trade off for increased flexibility. This can be seen by many pensions administrators who have already witnessed a clear increase in DB transfer quotation requests since the 2014 Budget.
The Government’s point of view
The main problem here is that funded DB schemes play a crucial role in funding long term investment in the UK economy. Without this, the Government is bound to be nervous about the impact a rush to transfer into DC schemes would have on the financial markets. Finding a balance between economic impact and ethical considerations can prove to be difficult.
An intermediary position?
In trying to find a balance, the Government may look to a middle ground, placing restrictions on transfers. For example, placing a cap on the yearly amount that members can transfer, or requiring prior approval from the DB scheme trustees. Regardless, if the Government decides against the ban, it needs to find a way of managing the risks and issues around transferring.
Due to the uncertainty about whether, and if so, when this will all go ahead, we will simply have to wait for the Government’s decision following the recent consultation to see what happens. The decision is expected to be announced before Parliament’s summer recess on 22 July 2014, we will keep you updated.
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