The option to contract out through certain defined contribution arrangements was introduced in 1988 and extended to stakeholder pensions in 2000. Such arrangements had to be able to meet the protected rights test, with the fund that relates to those rights identifiable from non-protected rights and the pension arising from them to follow a prescribed basis.
Almost immediately a market developed for transfers from defined benefit schemes, especially for individuals with frozen pension rights relating to former employers’ schemes.
Arguably, this was at the base of the pensions misselling scandal in the 1980s and efforts have been made since to ensure this is not repeated. The outcome has been a very specialist and highly regulated area of the advice market.
Contracting out through DC arrangements is due to end on April 5, 2012. From that point on, anyone that was contracted out through a DC scheme will automatically be contracted back into the state second pension.
The irony of the situation is that this option is being removed at a time when DB arrangements are in significant decline as the majority of employers’ choice for inclusion in their remuneration package.
From April 6, 2012, DC schemes will no longer be required to track protected rights separately from non-protected rights because they will cease to exist. This means that all of an individual’s DC pension pot can be used to provide benefits on the same basis, with or without a pension for a surviving spouse.
As protected rights will cease to exist and DC schemes will cease to be eligible to hold contracted-out rights, it will no longer be possible to transfer to them from DB schemes. Of course, transfers from DB schemes to individual plans may still be possible but they will generally be limited to plans that are capable of preserving any guaranteed minimum pension in the ceding scheme.
The Guaranteed Minimum Pension is broadly the pension right that arises for periods of contracted-out service in DB schemes prior to April 5, 1997, after which contracting out via DB schemes moved to a reference scheme basis.
Preserving the GMP within an individual arrangement tends to be costly and therefore less flexible and less attractive than the current option of transferring protected rights to, say, a personal pension or Sipp, if that is deemed appropriate.
Unless the situation changes there is likely to be lots of people seeking transfer advice within a short space of time. Tempting though it might be to look upon this as a sell while stocks last opportunity, it is important to ensure the correct regulated process is followed. Let’s hope that, for the profession, it is not a case of dèjà vu.
Stephen Greenstreet is managing director of Origen