Rowan Harris contributed to the writing of this blog post.
Following our prediction last week, the government has announced today that it will not ban members of defined benefit (DB) pension schemes from transferring into defined contribution (DC) schemes to make use of the flexibility created by the Budget earlier this year. This is good news for employers looking to manage their DB liabilities, and for members looking to take advantage of new flexibilities in DC schemes.
Members will need to receive regulated advice before they transfer (previously, such advice has only been a requirement where the transfer process was initiated by the employer). This advice will need to be paid for by the member, except where the transfer is from DB to DC within the same scheme or as a result of an employer-led incentive exercise, in which case the employer will need to meet the cost. This will mean that members have sufficient knowledge to make the most suitable decision for themselves.
Companies who want to be on the front foot should look at the choices their schemes offer to members. Members will be most likely to consider their choices in the run-up to retirement, and schemes can make this easier by quoting transfer value options as standard at the point of retirement. Companies may also want to provide easy access to independent financial advice so that members can feel confident in taking decisions regarding their own pension savings. If employers do not provide sufficient support to members, fewer members may take up transfer options which could result in net losses for employers compared to the current position.
It is also vital to the take-up rate that there are solutions available for members who do not want to access all their pension savings in one lump sum. Income drawdown is currently a niche market. Pension providers are working hard to develop products to reach wider markets by April 2015, and these must be clear and simple if they are to be a success.
The announcement puts the prospect of enhanced transfer value exercises back on the table. If properly managed, and with engagement with scheme trustees and best practice advice to members, these exercises can allow employers to better manage their DB scheme liabilities while being of benefit to members in certain circumstances.
The Government is also intending to consult on whether to allow – in full or in part – the new flexibilities to apply directly to DB schemes, as well as DC. The chief advantage of this would be ease of use by members and reduced administration costs over time. However, depending on how the exchange of accrued DB pension for cash might work, this could be another valuable opportunity for employers to manage their DB liabilities and reduce cost and we await the consultation with interest.