It is welcome news that the Government has today announced its decision not to ban transfers from private sector defined benefit (DB) pension schemes to defined contribution (DC) schemes. This leaves useful options open to members looking to take advantage of new flexibilities in DC schemes, and for employers looking to manage their DB liabilities.
"If properly advised there are opportunities for employers to better manage their DB scheme liabilities given the forthcoming changes."
Adding the requirement that members receive regulated advice is a also a welcome and necessary measure which will arm members with the correct knowledge in order to make the most suitable decision for themselves.
Now that the uncertainty is over, companies should look at the choices their schemes offer to members. I expect that schemes will begin to give members the option, as standard, of taking a transfer at the point of retirement, so that the member can make use of their benefits in the way most appropriate to their individual circumstances. If properly advised, and with appropriate communication and guidance to members, there are opportunities for employers to better manage their DB scheme liabilities given the forthcoming changes.
The Government’s reasons for considering a ban were unrelated to member outcomes, but there is a significant danger that members will transfer out of DB schemes without strategies in place to mitigate the risks they are taking on (primarily inflation, investment, and longevity). Employers may also see low take-up rates for such options (resulting in net losses instead of savings) if members are confused about how to manage their funds through retirement and therefore reject the option.
The key problem is that the UK’s income drawdown market is not sufficiently developed to meet the needs of the masses, although insurers are working hard to bring products to market for April 2015. Until then, employers wishing to make an early start on opening up this flexibility to their DB members should make sure they understand these issues and seek to ensure that members receive appropriate advice.