Advisers have hit out at Government plans to stop the majority of people from transferring out of final-salary pensions into defined-contribution schemes from April 2012.
Money Marketing last week revealed the Department for Work and Pensions’ proposals to end transfers, included in a consultation setting out the draft legislation for the abolition of contracting out.
The consultation says: “In addition to contracting-out terms, references to transfers between contracted-out def-ined-benefit and contracted-out DC schemes have been removed as this will no longer be possible post-abolition.”
Some pre-1997 benefits, called excess benefits, will be exempt from the change as well as non-contracted-out defined-benefit schemes but the bulk of transfers will be blocked in a move that advisers say will be disastrous.
A DWP spokesman says: “If the final-salary scheme is a contracted-out scheme, an individual would not be able to transfer to a personal pension. If not contracted out, you could transfer your final-salary scheme to a personal pension.”
Richard Jacobs Pension & Trustee Services managing director Richard Jacobs says the Government could be in the firing line on the grounds of contravening human rights.
He says: “There are so many reasons the Government cannot go ahead with this. It is ridiculous. You are going to have human rights issues here bec-ause people will be able to transfer from one type of pension scheme but not from another. It beggars belief. The recent spate of pension consultations have in the main been logical but this seems to be someone riding on a wave without thinking of the consequences.”
Intelligent Pensions technical director David Trenner (pictured) says the plans would kickstart a fire sale between now and April 2012, with some people switching for the wrong reasons.
He says: “If this goes through, it will undoubtedly result in a fire sale in terms of transfers out of DB schemes and people who are not sure whether they want to transfer could well sign up because it is their last chance. Some advisers would be saying buy now while stocks last.
“I know we are talking about politicians and civil servants but it is hard to believe that will be allowed to happen. If it does, you can bet there will be people who establish schemes with the sole purpose of getting around it.”
Informed Choice chief executive Nick Bamford says: “It just does not make sense. Not many people transfer but, for those people where it is sensible to do so, the Government is set to deny them the opportunity of potentially improving their position.”
Web comments on transfer ban
How will this affect pension-sharing orders on DB schemes that will not accept the divorced spouse as a member? As most seem to be female, surely it will fall foul of sex discrimination legislation. Yet another case for the European courts.
It is aggressive legislation when more specific legislation is needed based on what is best for the consumer. Freedom and choice have been removed and, given that the Queen’s speech said: “My Government’s legislative programme will be based upon the principles of freedom, fairness and responsibility,” one would have to question if this legislation fits that promise.
So, someone leaves a firm with accrued benefits under the terms of a DB scheme. The former employee is locked into a DB scheme, regardless of his own wishes, and the employer goes to the wall. It is outrageous that such legislation could even be contemplated, let alone be forced through.
I believe this is an unintended consequence of the changes to contacting out. I think we will find transfers will be permitted, with a rewording. After all, pre-2012 protected rights pots built up either through transfer or direct defined-contribution contracting out will remain in a defined-contribution environment.
Let us see how a “pro-individual choice” Government may react to lobbying. Transferring out is not for everyone but to restrict this option by mandatory continued membership is anti-personal choice.
What a mess. Does anyone in Government know what they are doing? We are now going to see a rush of bad decisions and there may well be lots of ’unintended consequences’ yet again.
Transferring from a contracted-out DB scheme will still be allowed after April 2012 but the receiving scheme would have to be a section 32. The same change proposed would also stop a transfer from a section 32 to a PPP from April 2012.
This does not sound like it has been thought through. Did the DWP discuss it with anyone in the pension industry first? Once again, can we have some kind of delay while sensible discussions can take place about how to draft things without such bad unintended consequences?
What is the point of this consultation? The abolition of contracting out on a defined-contribution basis has been discussed for years and now the Department for Work and Pensions squeezes in a rule that has never been expected or debated before. And it is given as a fait accompli, there is no request for any consultation on this issue.
So, a single person in ill-health who wants to release their tax-free lump sum and leave the balance of their benefits invested so their family can get it when they die will not be allowed to do this and, instead, they and their family will get nothing from the scheme?
Some defined-benefit schemes have a poor return on death before retirement, sometimes only return of contributions if a member has left service. If a deferred member had a terminal illness and wanted to take a TV to PP, for example, it would seem as if this route would be blocked. This cannot be in the client’s best interests (although, naturally, it does leave the scheme’s funding position that much better off).