25th June 2014
The Treasury is mulling banning transfers from defined benefit pension schemes to defined contribution plans. The fear is that there could be a mass exodus from such schemes as their members try and take advantage of the retirement income reforms most of which come into effect from next year.
(A defined benefit scheme is – in general terms – where your pension depends on your years’ service though you and your employer may pay substantial contributions – the latter is where what you and your employer pay in plus your investment returns determines what you get as a pension. DC lends itself to income flexibility. DB does not hence the issue surrounding transfers).
Mindful Money believes that having opened up a reform to many pension investors, the Government should endeavour to extend it as widely as possible.
First pension firm Standard Life has already made a strong argument for why allowing the transfers does not point to some sort of economic disaster with slumping demands for gilts.
Second in our view, it would be inconsistent to promise so much freedom and personal responsibility then to deny private sector defined benefit scheme members access to such freedoms.
It is probably right that State and local government-backed pension scheme members are not allowed to participate as of right. They may well have signed up for the pension benefits that come with such employment – i.e. defined by length of service – and rewriting the rules and allowing transfers could have significant implications for schemes. Even here, we think the Government needs to make detailed arguments for why a ban is necessary.
Standard Life also suggested that investors should be required to seek advice from a regulated IFA. This has some appeal, because it means anyone transferring will be doing so fully equipped with the information required to make the right decision. Such advice probably needs divorced from any transaction or recommendation for example an adviser shouldn’t be pointing people to a particular income drawdown provider.
And we suspect some people will be unhappy about being forced to follow such a course, but placed alongside staying in a scheme pension you don’t want to be in, it is surely a reasonably small price to pay. The advisers who advise on such moves are highly qualified professionals.
Admittedly a look at history tells us why the Government might favour a ban. Transfers from company DB schemes in the past have caused a whole pensions review worth of trouble. But surely such detriment is a thing of the past with modern regulation.
There are strict rules and procedures an adviser must follow before they recommend a transfer. It is not a transfer primarily for accumulation purposes – i.e. building up a big pot, but to allow a pension income to be taken flexibly. Even if an investor still hopes to gain significant returns with their remaining pot, the main driver will be a desire to access the pension savings in the most beneficial way possible.
Members of defined benefit schemes are increasingly the lucky minority. They may well have more of a pension compared with their earnings history than most others, whether they take the money as a scheme pension or whether they transfer it to income drawdown. But that surely isn’t the issue here. When you bring in a liberalising reform, one that is meant to encourage personal responsibility – surely it should be extended as widely as possible.