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.
"Allowing members to take compensation out of the PPF that has been paid for by levy payers would be a matter requiring wider debate."
However not everyone thinks a rule change at the PPF is a good idea.
Alistair McQueen, head of savings & retirement at Aviva, told FTAdviser: “The PPF is a force for good in the UK pension system, it provides confidence and security for people in DB pension schemes.
“Whenever we look at the PPF I feel that it is really important to keep it in context - 98 per cent of savers in DB are not in the PPF.”
For Mr McQueen, now is not the time to be raising the question if individuals should be allowed to transfer out their savings from the pensions lifeboat.
He said: “There is enough scrutiny around pension freedoms at the moment, as to if people that are transferring out are acting sensibly and are receiving enough support. To add a second wave of people into the pension freedoms just now in a contentious area as the PPF, it is worthy of consideration, but there are other things to focus on.”
Rob Hammond, partner at First Actuarial, argued allowing pension freedoms in the PPF would introduce even more complexity.
He said: “What benefits should be valued? Probably just PPF benefits (not full scheme benefits). What value should be placed on the transfer?
“Should this be the member’s share of the PPF liability? If so, the PPF might suffer if it is only the single members in poorer health who transfer out, leaving behind the married members in better health.”
Even if only PPF benefits are valued, it is possible that the transfer value quoted after the scheme has transferred to the PPF could be lower (or potentially higher), than it would have been before the scheme transferred, Mr Hammond said.
He added: “This could lead to members being disgruntled that they ‘missed the boat’ or ‘jumped too early’.”
As at 31 March 2017, the PPF was 121 per cent funded with £6.1bn of reserves.
Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, argued that there’s no logic behind allowing PPF members to transfer out.
He said: “Any transfer out would presumably be on one of two basis: either a reduced cash equivalent transfer value (CETV) to reflect the scheme’s funding position; or a ‘full’ CETV to give a DC pension of approximate actuarial equivalence.”
The former “would almost certainly not be signed off by a pension transfer specialist,” since the reduced CETV will not give a pension of approximate value to the benefit to be provided by the PPF, let alone the benefit under a former scheme, Mr Lacey said.
The latter “would either effectively require either a cross subsidy from their fellow existing PPF scheme members at a time when their benefits have already been reduced, or would require an increased levy on other DB schemes to pay any shortfall,” he added.
“Neither course of action is palatable,” he concluded.
maria.espadinha@ft.com
