PensionsAug 23 2016

Ban on defined benefit transfers would be ‘unfair’

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Ban on defined benefit transfers would be ‘unfair’

A potential ban on transfers from defined benefit schemes could cause panic, according to Towry’s head of retirement planning.

Andy James said there has recently been speculation that the government may impose a blanket ban on transfers from pension schemes in the fall-out of the BHS debacle, which saw questions raised about the sustainability of final salary schemes and the position of the Pension Protection Fund.

The Work and Pensions select committee has launched an inquiry into final salary schemes and is considering whether to give The Pensions Regulator more power over the way companies run their pension schemes.

Mr James said: “The proposals being discussed would allow employers to reduce the pensions paid from their scheme if it is in deficit and the employer is unable to fully fund contributions.

“And they may be able to do this in future without the agreement of the courts, which is not the case today.

“To escape these changes, existing members may be encouraged to transfer out of the scheme now before any reductions in future pension payments can take effect.

“But a rush of withdrawals or transfers out of a pension scheme can cause real problems for the trustees. And this has led to a call from some parties for a ban on any transfers out of final salary schemes.

“Such a ban could mean that members are locked into a scheme where they are not certain of the future pension they will receive which is, of course, one of the main advantages of a final salary scheme in the first place.

“So preventing members or employees from securing benefits outside of the employer’s scheme would seem unfair.

“Moving away from a final salary scheme can make sense for some people. The improved flexibility of how income and tax free cash can be taken certainly appeals to some, as does the ability to have their own funds invested however they choose.

“Currently, one of the main reasons to transfer out of a final salary pension into a money purchase or defined contribution pension, is the difference in how the accumulated funds are treated on death.

“Any income from a final salary pension tends to cease on the death of the member and thereafter their spouse or partner. Whereas any funds in a defined contribution pension can be passed on to other family members on death.”

Earlier this month consultant Hymans Robertson said plummeting gilt yields have pushed the UK’s collective defined benefit pensions deficit past the £1trn mark for the first time.

The Association of Consulting Actuaries has also objected to a ban on transfers from DB schemes, saying it could cause a “rush for the door” and lock people into schemes where they have no benefits forthcoming.

Among the issues the Work and Pensions Select Committee will look at are the need for more “pro-active” regulation, the powers of pension scheme trustees and the regime governing how companies are bought and sold.

When asked to comment on Towry’s remarks, a spokesman for the Department for Work & Pensions said it would not pre-empt work it is doing on this issue.