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DWP to ban DB-DC transfers

The Government is to stop the majority of people from transferring out of final-salary pensions into defined-contribution schemes from April 2012.

The Department for Work and Pensions revealed its plans to put an end to transfers in a consultation setting out the draft legislation for the abolition of contracting out.

Some pre-1997 benefits, called excess benefits, will be exempt from the change as well as non-contracted out defined benefit schemes.

The consultation says: “In addition to contracting-out terms, references to transfers between contracted-out defined-benefit and contracted-out DC schemes have been removed, as this will no longer be possible post-abolition.”

But the industry has hit out at the move. Standard Life senior pensions policy manager Andy Tully believes the Government has ruled out transfers simply because defined-benefit schemes will continue to allow contracting out after 2012 while DC schemes will not.

He says: “This is a retrograde step that takes away consumer freedom and choice. The Government has been too simplistic. It needs to stand back and consider how this affects individuals because, for some people, such as those with significant benefits who believe their employer may go into liquidation, transferring can be the right thing to do.

“If the Government is comfortable allowing people to transfer from DB to DC before 2012, it must be able to find a way to write the legislation so people can transfer after 2012 if it suits their circumstances.”

Hargreaves Lansdown pensions analyst Laith Khalaf says: “Restricting choice would be a backward step, particularly given the new flexible drawdown arrangements that DC schemes will enjoy from April.”

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.”

Please click here to view a PDF of the consultation paper


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There are 26 comments at the moment, we would love to hear your opinion too.

  1. very clever. Few people know that a transfer from GMP to protected-rights can increase the residual state pension . Maybe this is trying to save money not protect people !

  2. Get a correct protection scheme in place then. They will have to allow early retirement.
    The reaon people were transferring out was because they could not retire early and were nervous of employers failing.
    Bad time to bring this in with a recession and companies failing??

  3. I wish they would do it now. My worst nightmare is an old school chum who just popped up, worked for the same company 36 years and their DB scheme is only 48% funded. How easy to tell him he has no choice but to risk it.?

  4. How will this effect pension sharing orders on DB schemes that won’t 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!!

  5. Many will benefit but the few that will lose out are not served well by this. It is aggressive legislation when more specific legislation is needed based on what is best for the consumer.
    As the article says freedom and choice have been removed and given the Queens 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.

  6. This surely raises the question of whether or not somebody prevented from transferring out preserved defined benefits to a DC scheme shortly before the DB scheme is wound up insolvent could then sue the government for having enacted legislation the direct result of which will have been to materially disadvantage them.

    In May 2012 they might well have been offered a full TV but then subsequently be offered a much reduced one ~ and they might have to wait a long time, possibly years, before the scheme was prepared to release it. How is that supposed to be a step forward? Is the NAPF making any representations to the government?

  7. 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 circumstances, and the employer goes to the wall.

    Outrageous that such legislation could even be contemplated let alone be forced through !

    But we already know that we are being ruled by people in parliament, civil servants, and a tens-of-thousands of quangocrats, who don’t have a clue except when it comes to lining their own pockets.

  8. Do we have ANY joined-up government WHATSOEVER. Bloody DWP clowns.

  9. Very strange. Wasn’t it a dogmatic Tory – Nigel Lawson – who set in motion the destruction of DB by encouraging transfers ?

  10. Colin Tomlinson 12th August 2010 at 1:42 pm

    So someone at death’s door who wants to provide a spouse’s pension in excess of the scheme rules
    Or a scheme that hasn’t adopted post A Day tax free cash rules and provides a pitiful commutation factor
    Or someone who’s employer is approaching insolvency but they have a preserved pension in excess of £31k
    The end of DB opt outs is a good idea, is it?
    And the employer will need to carry the burden of investment
    Win Win. Well done DWP

  11. I believe that this is an unintended consequence of the changes to contacting out.

    I think that we will find transfers will be permitted, with a re-wording. After all, pre 2012 protected rights pots built up either through transfer or direct DC contracting out, will remain in a DC environment.

  12. Lets 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.

    Some good points raised. Can’t really understand why they will allow DB Schemes post April 2012 to continue to be contracted out if for DC it will end.

    perhaps a member of the actuarial profession shall shed some light on this.

  13. 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.

  14. Transferring out from a contracted out DB will still be allowed post April 2012, however, the receiving scheme would have to be a section 32. The same change proposed by the DWP would also stop a transfer from a section 32 to a PPP from April 2012.

  15. This doesn’t sound like it has been thought through. Did the DWP discuss it with anyone else in the pensions industry first?
    Once again, can we have some kind of delay whilst sensible discussions can take place about how to draft things WITHOUT such bad unintended consequences?

  16. Before we all rush off assuming that what MM have published is “gospel”:

    1) What’s the source for this?

    The only recent consultation paper I can find on the DWP web site is the one on the abolition of contracting-out on a DC basis dated 28th July.

    I must admit that I find DWP publications generally imprenetrable, but I could not find any references to stopping DB to DC transfers.

    If anyone can set me right I’d be most grateful.

    2) This is ony a consultation paper. If the conclusion that DB to DC transfers will be banned is correct then those of you above who have set out reasons for the continuation of pension transfers can let the DWP know what a mistake they are making.

  17. What is the point of this consultation? The abolition of contracting out on a DC basis has been discussed for years and now the DWP squeeze in a rule (Tim – Page 14) that has never been expected or debated before (as far as I know). And it is given as a fait accompli, there is no request for consultation on this issue.

  18. So, a single person in ill-health that 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 them and their family will get nothing from the scheme – well done!!!

  19. To Tim Page:

    There is a link to a PDF published by the DWP at the end of the article.

  20. Good point raised by Gary King. Some DB schemes have a poor return on death before retirement, sometimes only return of contributions if a member had 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 clients’ best interests ( although, naturally, it does leave the Schemes’ funding position that much better off… )

  21. I believe that this is an unintended consequence of the changes to contacting out.

    I think that we will find transfers will be permitted, with a re-wording. After all, pre 2012 protected rights pots built up either through transfer or direct DC contracting out, will remain in a DC environment.

    Indeed it still is a consultation – not a unilateral change. When the government looks at the possible effects of the proposal (like the divorce examlpe cited by another poster) it is likely that they will make amendments to the proposals

  22. That’s yet more simplification! Another set of rules & never know another JO Exam!!?

    Suppose it keeps us in work as Joe Public not got a chance!

  23. David Quarrell APFS 13th August 2010 at 9:25 pm

    So The transfer fom a db which allowed a client to take £177500 pcls rather than the schemes £66,000 and a drawdown income of £42,000pa rather than £32,000 scheme pension plus vastly improved spouse benefits would not be allowed- why? because government know best? You know nothing, keep out!

  24. David Quarrell APFS 13th August 2010 at 9:28 pm

    Or a scheme that upon death in deferment provides £20,000 return of contributions as opposed to a transfer value of £268,000. Don’t worry the DWP knows best ! Bless.

  25. Until I saw the DWP spokesperson comment, I thought it was simply poor wording – you won’t be able to transfer to a co-out DC arrangement, simply because the concept of ‘contracted-out/Prot Rights’ benefits will cease to exist, so it will all be seen a non-PR benefits. Let’s hope the spokesperson didn’t actually know what they were talking about!

  26. C/out via DB but not via DC.

    In my eyes this is nothing more than good old fashion DISCRIMINATION plain and simple.

    You can’t discriminate by race, creed, colour, sexual orientation, age but the DWP and the Government can quite happily conremplate enacting legislation which will enshrine discrimination against individuals based on their type of pension.

    C/out should remain an option for all or none at all.

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