The Department for Work and Pensions (DWP) has published a consultation and draft regulations on the proposal to allow the transfer of the contracted-out benefits of pensioner members to schemes that have never been contracted-out. The consultation is the DWP’s response to an “urgent demand by the industry”.
Why is this change needed?
Contracting-out on a salary related basis was abolished in April 2016. There are only limited circumstances in which contracted-out salary related (COSR) benefits may be transferred to schemes which have never been contracted-out. While the contracted-out benefits of deferred members may be transferred, with their consent, to a scheme which has never been contracted-out, the benefits of pensioners cannot be so transferred. In addition, bulk transfers of contracted-out benefits without member consent cannot be made to schemes which have never been contracted-out. The DWP acknowledges that the industry wants legislation to be introduced which would permit such bulk transfers to be made, and has indicated that it will consult on this issue later in the year.
The current consultation looks only at a specific set of circumstances. Where a scheme providing COSR benefits is likely to transfer to the Pension Protection Fund (PPF), one option trustees could consider (if the legislation permitted it) is to establish a new scheme and transfer the benefits of pensioners to that scheme. Taking such action could lead to a better outcome for pensioners than if their scheme were to enter into the PPF and it could reduce the liabilities of the scheme. However, current legislation does not allow pensioners with COSR benefits to transfer to a new scheme that has never been contracted out, even if they give consent.
What is the proposal?
The consultation proposes to introduce legislation enabling the COSR benefits of pensioners to be transferred, with their consent, to a scheme that has never been contracted out. However, the circumstances of such a transfer would be limited. Under the proposal, this type of transfer could only take place where:
- the transferring scheme is in a PPF assessment period; or
- the transferring scheme has entered into a regulated apportionment arrangement: these are used infrequently.
Transfers to overseas schemes would be excluded. In addition, for the transfer to go ahead, the pensioner would need to:
- give their consent in writing;
- acknowledge to the transferring scheme in writing that the benefits provided by the receiving scheme may be in a different form and amount to those which would have been payable by the transferring scheme, and that there is no statutory requirement on the receiving scheme to provide a survivor’s pension.
It may be difficult to obtain the consent of all relevant pensioner members, or even be able to locate them all to request their consent.
Although the circumstances in which a transfer could take place are very limited, this first step towards more flexibility in the transfer of COSR benefits will be welcomed by the pensions industry. As noted above, the DWP has said that the issue of making bulk transfers of COSR benefits without consent to schemes which have never been contracted-out will be considered later this year. Passing such further reaching legislation is likely to be of much greater interest to the industry and more widely used.
The current consultation ends on 23 April 2017 and can be viewed here.
This blog post was written by Patricia Bailey . For further information, please contact:
Michael Collins, partner, Pensions
T: 0121 234 0236
 Draft Contracting-out (Transfer and Transfer Payment) (Amendment) Regulations 2017.