Aegon is calling for a rule change to allow people forced into the Pension Protection Fund (PPF) to transfer their savings out to enjoy the same pension freedoms as other retirees.
Steven Cameron, pensions director at Aegon, told FTAdviser it is time “to explore how best to update the PPF’s rules to allow people to consider transferring out into a defined contribution [DC] arrangement, having taken advice, if they want the flexibility the pension freedoms offer”.
The increasingly important role of the pensions lifeboat in the UK defined benefit (DB) pensions market has been highlighted recently by cases such as Carillion, British Steel and BHS, where the companies failed and their pension schemes were forced into the PPF.
When scheme members enter the PPF, the benefits that they will receive will depend on their status.
Retired members will receive their pensions in full, while those yet to reach retirement will see cuts of typically between 10 per cent and 20 per cent.
Mr Cameron said: “The PPF plays an important role in protecting members of inadequately funded DB pension schemes where their employer becomes insolvent. Members benefit where the scheme is taken into the PPF, receiving compensation covering the majority of their scheme pension.
“However, one significant downside is that the PPF doesn’t allow individuals to transfer out, for example to take advantage of the pension freedoms available within DC schemes.”
Pension freedoms rules allow those in defined contribution schemes to access their entire nest egg in one go. However to take advantage of these rules, DB pension holders must transfer into a defined contribution scheme.
Mr Cameron argued that there is a “huge demand” for advice on pension transfers and, for many, the reason is to access the pension freedoms.
He said: “As things stand, once in the PPF, individuals lose the ability to transfer out or to choose to draw this in a flexible way if that better meets their retirement needs.”
After the introduction of pension freedoms in 2015, the volume of DB pension transfers has been soaring, as savers seek to take advantage of sky-high transfer values and to move their nest eggs into DC schemes in order to access their cash.
According to the latest PPF statistics, from October, over 230,000 individuals have been transferred into the pensions lifeboat since it was set up.
From these, over 125,000 are already benefitting from compensation but a further 100,000 are still to receive their first payment, said Mr Cameron.
He added: “For them, their protection comes at the cost of flexibility, which the government made far greater when it introduced pension freedoms in 2015.”
A spokesperson at the PPF said that the fund it would be for parliament to change how PPF compensation operates.
"The PPF’s funding strategy, successful long-term investment strategy and level of levy are all set in the context of the current compensation framework.
"Schemes which transfer to the PPF are inherently underfunded, unable to pay at least what the PPF would pay. The shortfall is made up by the levy paid by other pension schemes, recoveries and our investment returns.