PensionsDec 18 2017

Pension scheme bulk transfers leaving members worse off

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Pension scheme bulk transfers leaving members worse off

Several pension schemes have opted for a buy-out policy to transfer their members to a defined contribution (DC) plan without their consent which has potentially left them worse off, due to restrictive bulk transfer rules.

By using a section 32 buy-out policy, employers can transfer pension benefits built up in a workplace pension to an individual policy, avoiding the need for an actuarial certificate or an existing relationship between the employers using the schemes.

The need for member consent or consultation is also avoided.

However, according to a spokesperson at workplace provider The People’s Pension, transferring savers through one of these contracts often does not meet the needs of the members, who “usually wish to consolidate their DC pots in the arrangement the employer has chosen for future contributions,” a spokesperson said.

She added: “We have seen examples of a certificate not been granted for a bulk transfer to a DC scheme and trustees being forced to wind-up to a section 32, which was higher charging and an objectively worse contract than the intended recipient scheme.”

This is due to the fact that under a section 32 process, the receiving scheme needs to replicate exactly the same conditions of the original plan, such as charges, which can be higher than the ones applied by the receiving scheme.

The Department for Work & Pensions (DWP) published draft legislation on DC bulk transfers in October, which are poised to make bulk transfers easier by abolishing the need for an actuarial certificate or a related employer.

The requirement for an actuarial certificate should be removed for ‘pure’ DC-DC transfers, where there are no potentially valuable guarantees or options to be assessed.

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.

In its response to the government’s consultation, The People’s Pension said that the government should also look to ensure that section 32 buy-outs “are at least subject to the same consumer protections as other bulk transfers”.

It said: “Ideally, the government should consider whether they are appropriate at all in a DC environment where there will be authorised master trusts into which members can be transferred.”

The DWP published at the end of November draft regulations on new rules for master trusts, which will include a compulsory authorisation regime.

Since 2015, The People’s Pension has concluded two bulk transfers without member consent, and has other three similar processes in the pipeline, the provider said in its response.

It said: “Most inquiries with us had concluded with the potential ceding trustees deciding that a section 32 process was easier as it avoided the need for an actuarial certificate or a related employer.”

The spokesperson declined to reveal more details on these transfers.

William Burrows, retirement director at Better Retirement, said that he can see the two sides of this argument. However, it should “always come down on the side of treating people as individuals rather than members”.

He said: “Although it is not practical to give everybody individual advice about the best course of action it is not right to move people in masse to new arrangements without regard to their individual circumstances and without the right safeguards. Clearly this is an area that needs more thought.”

maria.espadinha@ft.com