The Pension Schemes Act 2015 is set to be amended to make sure providers treat the value of safeguarded benefits, including those with guaranteed annuity rates (GAR), as equal to the actual transfer payment.
A statement from the Department for Work & Pensions published yesterday (7 March) outlined its response to the call for evidence on the valuation of pensions with a GAR, for the purposes of the advice safeguard.
The intention is that the regulatory changes will be laid before parliament later this month and come into force on 6 April.
On 23 November, the government published a consultation, which ran until 15 January 2016, seeking stakeholders’ views on - amongst other things - a proposed simplification of the valuation process for pension benefits which contain a GAR.
The document detailed providers should treat the value of safeguarded benefits, including those with a GAR, as equal to the actual transfer payment to which the member would have a statutory right in respect of those benefits.
The amended valuation approach will apply to both personal and occupational pension schemes, in respect of all types of safeguarded benefits.
However, the government noted concerns of some respondents that members are often not fully aware of the potential value of GARs attached to their pension benefits.
It plans to amend regulations so that ceding schemes are required to send a personalised risk warning to members considering transferring or surrendering their GAR benefits, with further consultation ahead of changes coming this summer.
The government agreed it is crucial steps are made to ensure members understand and appreciate the benefits conferred by a GAR before they make a decision to surrender these benefits.
The DWP received a total of 24 responses from a variety of pension schemes, representative bodies and individuals to the consultation.
All were in favour of changing the GAR valuation process for the purposes of the advice threshold, with several stating valuing a GAR is a complex process and there is no agreed approach to doing so.
“A number of respondents believed that the existing situation, whereby members often receive one value to determine whether they are required to seek independent financial advice, which takes into the account the value of the GAR, and a separate, lower, transfer value, is confusing for members,” read the document.
Respondents universally felt that a more straightforward valuation methodology would be easier for providers to administer and communicate.
However, views on exactly how the valuation process should be changed were more mixed.
Eleven respondents felt, for the purposes of the advice requirement, pension pots with a GAR should be valued as equal to the transfer payment that would be available if the member decided to transfer out.
Of the other respondents, nine, including all individual respondents and several professional bodies, were opposed to changing the current valuation process in this way, generally on the grounds that it would not reflect the full value of the GAR.
Four respondents who were opposed to using the transfer value suggested that an income threshold (such as a projected £2,000 or greater annual income) should be used rather than a fund value threshold to determine whether financial advice was required.