Defined Benefit  

DWP changes rules for contracted-out pension transfers

DWP changes rules for contracted-out pension transfers

The rules governing the transfer of contracted-out pension liabilities are set to change to allow members of failing schemes to transfer into a new scheme, the Department for Work and Pensions has announced.

The rule change could save the contracted-out portion of members' pensions from falling into the Pension Protection Fund, an event which sees non-retired members take a compulsory 10 per cent benefit cut.

The change is therefore designed to save pensioners money. However, DWP did not specify when the legislation would be changed, meaning it is likely to depend on the outcome of the general election on 8 June.

DWP reached its decision following an unusually short consultation period, in which just 11 parties submitted their views.

In a statement released today (27 May), DWP stated: "Legislation will be changed to allow the possibility for contracted-out pensioner members, with their consent, to be transferred into a new scheme." 

The statement went on: "The intended effect is to allow schemes to provide an alternative option for contracted-out pensioner members where the only current option would be to enter the PPF, such that they have the potential opportunity to receive a higher level of pension than the PPF level of compensation."

"Contracting out" arrangements were part of the previous two-tier state pension, which saw retirees receive a basic state pension, plus an additional state pension based on earnings and national insurance contributions.

The management of the latter could be "contracted out" to an individual's workplace pension scheme, meaning the scheme, rather than the government, took on the liabilities.

This two-tier system was replaced by the new, single-tier, flat-rate state pension in April 2016, meaning from that date no scheme could offer new contracting out polices.

This created a problem, however, for members who wanted to transfer the contracted-out portion of their pension to a new scheme.

Under the current rules, contracted-out liabilities are only transferable to a scheme that already offers contracting out functions to its members.

But because contracting out is no longer permitted, that means, in the government's words, it is "impossible to transfer contracted-out pensioners into a new scheme even where it would be beneficial to them".

The government said it would change this rule to scrap the requirement for the new scheme already to offer contracting-out services.

During the two-week consultation period, 11 respondents put in submissions, including pension consultancies, actuaries, industry bodies, and trade unions.

DWP said respondents had broadly supported the move. However, criticisms included: the consultation period was too short; that new schemes could apply different indexation of benefits, and therefore potentially inferior benefits; and that the new rules may not provide adequate provisions for multi-employer schemes.

However, DWP concluded that these objections were not serious enough to warrant abandoning or substantially amending the proposed changes to the law.

David Brooks, technical director at pensions consultancy Broadstone, welcomed the move. However, he said the decision to insist on obtaining member consent could prove to be impractical.