Government legislates on contracted-out pension transfers

Government legislates on contracted-out pension transfers

The Department for Work and Pensions (DWP) has issued draft legislation on contracted-out bulk transfers without member consent, which will guarantee that savers rights are not lost under the new state pension rules.

Between 1978 and 1997, employers sponsoring defined benefit (DB) pension schemes could contract their employees out of the additional state pension, as long as the scheme paid a comparable guaranteed minimum pension (GMP).

The GMP is payable for life at age 60 for women and 65 for men, and a survivor benefit is payable to a spouse or living partner.

The benefit of contracting out was that both employer and worker had a reduction in their National Insurance contribution.

With the introduction of the new state pension in 2016 and the abolition of contracting out, it’s no longer possible to transfer members contracted-out benefits without their consent to a scheme that has never been contracted out, which will be changed with the new legislation.

The new rules were expected since April, when the DWP announced this change, after a short consultation.

According to Steven Cameron, pensions director at Aegon, “while contracting out as a concept no longer exists, there are deferred members of DB schemes who have entitlements, as a result of the scheme having contracted out of the earnings-related state pension”. 

He said: “It’s important these rights are not lost.”

Mr Cameron argued that the new rules “will allow trustees to transfer members with contracted-out rights in bulk without their consent to schemes which have never previously been contracted out, but only where members’ rights aren’t adversely affected, including such matters as revaluation of benefits”.

The draft rules state that savers must have the same protections in the receiving scheme that they had in the previous plan, such as “revaluation and indexation that would have been afforded to members if the transfer were to a formerly contracted-out scheme,” the DWP said.

Mr Cameron said: “In many circumstances, and not just in relation to contracted-out rights, obtaining express consent from every individual before transferring can prove challenging, even where a transfer is clearly in their interests.

“We support DWP permitting bulk transfers without member consent in a variety of circumstances, provided there are protections in place to ensure members don’t lose out.”

The government recently also published new rules on defined contribution (DC) pension scheme bulk transfers, which will be made easier from April 2018.

DWP’s consultation on contracted-out pension transfers closes on 17 January.