Defined contribution (DC) members with small pension pots could lose out if they are moved to larger schemes, it has been claimed, as the process looks set to happen more often without their consent since the government has proposed new rules for facilitating bulk transfers.
Responding to a consultation launched by the Department for Work and Pensions (DWP) in October on DC pension scheme bulk transfers, one of the largest workplace pension providers, The People’s Pension, argued HM Revenue & Customs (HMRC) needs to change the rules regarding trivial commutation of small pots to prevent pensioners being hit by certain restrictions.
The People’s Pension said: “Currently, the conditions for claiming small pots are subject to less constraining conditions in small schemes [compared to when] they are in large schemes.
“If trustees of a small scheme transfer their members to a large scheme, the latter cannot access their small pots until after five years have elapsed.”
This rule is in place since 2009, when the Registered Pension Schemes (Authorised Payments) Regulations was published and came into force.
According to the People's Pension, this rule has prevented a transfer to the scheme from happening in the past.
It said: “One set of potential ceding trustees of a small scheme, with many deferred members, with whom we were in discussion concluded that these tax rules meant they could not pursue consolidation.
“The trustees considered that it might not be in the interest of most of their members, should they wish to withdraw their funds.”
The People’s Pension considers that “this lack of alignment between pension policy and tax policy potentially has the unintended consequence of working against scale”.
Sir Steve Webb, director of policy at Royal London, said there is need for a “much more relaxed approach to small pots”.
He said: “You wouldn't want any change that would make harder for people to take a pot of money that is never going to buy an annuity.”
According to William Burrows, retirement director at Better Retirement, it is “time the issue of small pots and annuities is resolved”.
He said: “Not only are they are costly to administer but there is little benefit to the member or policyholder in keeping small pots.
“The principles of pension freedoms should be extended to those with small pots and the government should make it easier for small pots to be converted into cash.”
The new DC bulk transfer rules, which will come into force in April 2018, scrap two previous prerequisites for bulk transfers without member consent.
The requirement for an actuarial certificate will be removed for ‘pure’ DC-DC transfers, where there are no potentially valuable guarantees or options to be assessed.
In response to a consultation on this matter last December, responders said that the cost of obtaining the certificate, and reviewing and acting on the actuary’s advice can be significant.
The scheme relationship condition, which currently requires transfers without consent to take place where there is some kind of underlying relationship between the employers using the schemes, will also be scrapped.
Master trust Now: Pensions, which also responded to the consultation, argued that the proposed regulations are a very important and positive step in the right direction
However, the provider points out that the “consultation refers to additional non-statutory guidance for DC transfers without consent to schemes authorised under the master trust regime”.
It said: “It is difficult to categorically confirm that the regulations achieve the policy proposal without having site of that guidance.”
Now: Pensions is also advocating that “it would advantageous for the new regime to include advice for receiving scheme trustees on what areas to consider before accepting bulk transfer without consent”.
This is due to the fact that the provider believes that there will be an increase in small scale bulk transfers.
“It would be beneficial for receiving scheme trustees to have a check-list for their own consideration before accepting such transfers,” it concluded.
maria.espadinha@ft.com
