Defined BenefitOct 14 2020

Advisers brace for 'biggest change in years' to public sector pensions

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Advisers brace for 'biggest change in years' to public sector pensions

Public sectors workers will need to seek specialist advice if government plans to rectify a pension discrimination issue go ahead, industry experts have warned.

As part of government proposals, public sector workers may have to choose which pension scheme to join and a poor decision could see them left out of pocket.

Therefore, the pensions industry is urging workers to seek advice to help them navigate these challenges.

Andrew Leal, head of healthcare at MHA MacIntyre Hudson, believes choosing a pension scheme will be really difficult and will test the sector’s advisory services.

He said: “We need to ensure there is sufficient capacity to provide specialist advice to NHS workers to allow them to make informed decisions on their retirement future.

“The proposed changes will also put the NHS Business Services Authority, which administers the NHS pension schemes, under more strain as it will be required to provide pension forecasts and pension growth figures based on membership of both schemes and to do so on a timely basis. 

“With so many factors in play and stakeholders involved, careful planning and support will be required to ensure anyone transitioning to the 2015 scheme has an efficient and fair experience.”

These proposed changes were put forward by the government for consultation earlier this year as part of its plans to implement the McCloud and Sargeant judgments to remove discrimination between pension scheme members. 

The issue concerns public sector pension scheme members who were enrolled into newer schemes while older scheme members' defined benefit pension accruals were protected from a downgrade.

Under the legacy schemes, pensions were based on years of service and final salary, whereas under the new schemes it was based on years of service and career average salary.

The courts ruled by doing this the government was discriminating against younger members based on age.

To resolve this HM Treasury suggested members should choose whether to receive benefits from the legacy or reformed schemes for the period between April 2015 and March 2022. 

It has also proposed two possible methods for making this decision – members will either have to decide on their scheme within 12 or 24 months after 31 March 2022, or they will be asked to decide when they access their benefits.

Rachael Hall, an independent financial adviser and NHS Pension specialist, believes the proposals are very complex because in order to make a choice the member has to first understand each scheme design.  

She said: “Many people will place different values on these features, which may be overlooked by those who make a choice based upon one issue, such as retirement age, or one which offers an instant tax rebate.  

“For example, the remedy is only for the period between 2015-2022, so a 1995 transition member choosing to return benefits to the legacy scheme may not be able to afford to retire at 60, which means that if they work on beyond this age the chances are that a reformed scheme could have created a higher pension.”

Due to this, seeking advice is essential, as the choice could have serious implications for retirement, Ms Hall said.

She added: “On the other hand, there could be issues for existing pensioners who may not be able to ‘afford’ to choose a higher pension, on the basis that they will need to repay any underpaid income tax during the statutory four year time limit (repayment plans needing to be factored into their cashflow planning) so discussions with tax advisers are essential, in order to avoid any nasty surprises.”

Parminder Gill, advice policy consultant at Wesleyan, said this consultation “is shaping up to be the biggest change to public sector pensions in the past five years”.

He said: “The proposed measures will have an impact on the retirement savings of millions – with potential implications for the size of their pensions pots and the amount of tax they will need to pay.

“The ‘right’ answer will very much depend on the individual, but almost everyone affected will have a complex decision to make factoring in projected pension benefits, planned retirement age, their life expectancy and any impact on their lifetime allowance or annual allowance of moving from one scheme to another.

“The process of resolving this will take some time, and the final proposal to members could look very different. 

“However, an update on the government’s intended way forward will provide those affected with more clarity around what this will mean for them and enable them to start factoring it into their retirement plans.”

The consultation closed on October 11 and member’s will now have to wait to see what the government’s next steps will be.

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