Royal London and the Association of Consulting Actuaries are calling for legislation to simplify defined benefit (DB) schemes, which would allow for a swifter pension transfer process.
In a 30-page paper, Simplifying pension benefits – is it time for the Pensions Pound?, the two bodies suggest there could be huge improvements if DB benefits were substituted with ‘standardised’ benefits of equal actuarial value.
They stressed simplification does not mean a reduction in the expected value of member benefits, rather it would allow them to be re-shaped.
There would be no reduction in members’ headline pensions – indeed the majority would likely see an increase at the effective date of conversion, although future indexation may then be lower, the paper stated.
Sir Steve Webb, director of policy at Royal London, said having standardised processes "could save both time and money" for financial advisers when dealing with DB transfers.
He said: "At the moment, one of the biggest complaints from advisers who do transfer business is that schemes don’t give enough information about the detailed rules of the DB scheme, and as a result they have to spend a lot of time chasing up extra information and this slows the whole process down."
The Pensions Regulator (TPR) is currently working on a DB transfer template to be filled in by pension administrators when asked for a transfer value.
This came in response to industry calls for standard rules to help the DB transfer process and is expected to reduce the number of information requests from advisers, and the time spent on this process.
Royal London and the Association of Consulting Actuaries also pointed out that members’ experience of taking independent financial advice would be expected to improve if a simplified benefit structure was put in place.
This was because when advisers are considering potential transfers from schemes with a consistent, simplified benefit structure, they can focus more on the member’s individual position and the likelihood of benefits being paid in full, the paper stated.
"This will enable members to more easily make better, informed decisions," it stated.
The research concluded the cost of running a pension scheme after simplification could be substantially reduced – by up to 50 per cent in some cases, which would "free up money to improve the security of member benefits or to reduce costs to employers".
Combining DB schemes into a ‘consolidator’ would also be simpler, as all members would have standardised benefits and the consolidator could run a scalable single structure scheme, rather than replicate dozens of separate benefit categories, the paper added.
According to Jenny Condron, chairwoman of the ACA, DB pension rights have "built up in a piecemeal way over a period of decades".
She said: "This makes them expensive to administer and complex for members to understand. Converting DB rights to a standard structure could yield huge savings and be to the benefit of schemes, employers and members alike."
Faith Dickson, member of the main committee of the Association of Pension Lawyers, which provided technical input to the research, said: "It’s so important for schemes to be able to focus on member security rather than complex administration, and pension simplification would be a huge step towards achieving this.
"Preserving historic complexities of pensions as we are doing now is doing members no favours, when simplification would provide the same value benefits and let schemes focus time and money on the best way of securing those benefits for them."
maria.espadinha@ft.com
