A Government amendment to the Pensions Bill is set to effectively kill off the market for scheme pension by reclassifying the arrangements as defined benefits.
The amendment clarifies the Government’s definition of a money-purchase scheme. Only an annuity purchased with an insurance company or income drawdown will now be recognised as money-purchase benefits. No exemption is provided for scheme pension.
As a result, scheme pension used through both Sipp and SSAS arrangements will be classified as DB and must comply with the corresponding legislation. This includes completing a funding valuation every three years, having a deficit correction plan if the scheme is in deficit and paying the Pension Protection Fund levy.
Standard Life head of pensions policy John Lawson says: “The costs of complying with DB rules will be enormous. If the Pensions Bill goes through as it is, scheme pension will be killed off.”
Lawson says any Sipp or SSAS which uses scheme pension will need either to run the scheme as a DB scheme or buy an annuity from an insurer to secure the promised pension.
Pension providers including Axa Wealth, Rowanmoor Pensions, Hornbuckle Mitchell and James Hay have been promoting scheme pension as an alternative to income drawdown.
Axa Wealth head of pensions development Mike Morrison says: “The massive impact will be on SSASs because there are more than 40,000 which have been set up on a money-purchase basis with the promise to pay a scheme pension on retirement.”
Hornbuckle Mitchell managing director David White says: “There are potentially thousands of SSASs using scheme pension to pay benefits, as well as many individuals taking benefits this way from Sipps. The consequences could be widespread.”
Rowanmoor Pensions head of pensions technical services Robert Graves says: “The industry needs to put pressure on the Government to consider the potential impact of this amendment.”
Advisers recommending scheme pension could face complaints if the amendment stands. Lawson says: “The adviser’s ability to defend complaints depends on how well they explained the possibility that scheme pensions could be legislated against.”
Worldwide Financial Planning IFA Nick McBreen says: “This will be a nightmare for companies and advisers who have offered scheme pension.”
The Pensions Bill went through its third reading in the House of Commons on October 18. Consideration of the amendments made will take place in the House of Lords on October 31.