Defined benefit schemes could see a short-term increase in requests from members to switch their benefits into defined contribution schemes, due to potential government plans to restrict such transfers, benefit consultants have predicted.
The government last month issued a consultation on how best to treat transfers from private sector DB to DC schemes, after plans giving members greater flexibility in accessing their DC pension pots were announced in the Budget.
The flexibility is going to suit so many people – I think a lot of people are going to be tempted by that
Hugh Nolan, JLT Employee Benefits
Chancellor George Osborne expressed concerns that members switching to DC schemes could damage the economy, as funded DB plans play an important role in long-term investment. Experts have voiced their belief that more DB members will request to transfer their benefits to DC.
While DB schemes offer members more generous increases, some people will be attracted by the opportunity to receive all their benefits within a few years, said Hugh Nolan, chief actuary at consultancy JLT Employee Benefits.
“The flexibility is going to suit so many people – I think a lot of people are going to be tempted by that,” said Nolan. There may well be an increase in employers advertising the opportunity for members to transfer their benefits from a DB to a DC scheme, in order to reduce their liabilities, he added.
The government also intends to remove the option for members of public sector schemes to move to DC plans, as larger benefit outflows could increase costs to the taxpayer, as many of these schemes are unfunded.
Jonathan Camfield, partner at consultancy LCP, said the Budget had the potential to “revolutionise” the pensions landscape. “The most interesting thing is what they allow in the way of transfers from DB to DC. There is complete uncertainty,” said Camfield.
He added there has been a range of responses from companies, trustees and members.
“Members are enquiring about possibly transferring their money now, because they may not be able to in the future,” said Camfield. “Employers are considering whether or not to run member-incentive exercises – for example enhanced value exercises – because they may not be able to in the future.”
Making transfers
Trustees are required by law to make a transfer of a member’s benefit when requested, provided the member is a year or more from retirement and they cease to accrue benefits in their current scheme.
However, many schemes will allow members to take a transfer less than year from retirement at their own discretion, said Nolan. The lowering of taxation on retirement lump sums comes into effect on April 1 2015.
“If there are schemes looking to put in place enhanced transfer-out options, they could consider doing that before, because you don’t know whether they’ll be able to after that,” said Catherine McKenna, partner at law firm Squire Sanders.
The government’s consultation could be seen as a “window of opportunity” for people looking to transfer their benefits into a DC scheme, said McKenna.
The legislation contains more detail on the conditions when a trustee should pay a transfer and could have a bearing on fighting pensions liberation.
There are paternalistic questions for trustees in allowing members to transfer their benefits when they consider it to not be in their best interest, McKenna said, adding:“There isn’t much fixed legislation on where a trustee can pay a transfer.”
Additional reporting by Lisa Botter
