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Kim North: Why the DB transfer rules need rewriting

Kim North

The new year brings with it a determination to set goals and adopt resolutions. Sorting out finances is a popular one. Indeed, Unbiased.co.uk reported a 57 per cent increase in the number of visitors to its “find an adviser” tool at the start of January.

Pensions, in particular, are high up on the list of issues to sort out, especially for the over-50s.

The industry eagerly awaits the publication of the Government’s green paper on defined benefit pension schemes, which is due any day now. It is widely expected that Work and Pensions Committee proposals to relax the rules for transferring small DB schemes will be adopted.

There needs to be a rewrite of the rules, as the present regulations assume an annuity is always bought, which of course is no longer true. The directions concerning the comparison of a critical yield and an annuity purchase are also less relevant. We expect changes around the indexation, valuation, consolidation and member protection themes too.

A combination of factors make DB transfers more attractive to those wanting the best from their investments this year. For example: DB pension transfer values were 15 per cent higher at the end of 2016 than the previous year, according to Xafinity. There are now 4,339 schemes in deficit, compared with 1,455 schemes in surplus.

The combined deficit of DB pensions increased by £29.2bn to £223.9bn at the end of 2016, according to the Pension Protection Fund – although this is far from the £459.4bn peak reached in August.

Meanwhile, an increasing number of household name pension schemes are finding themselves in the headlines. For instance, Royal Mail recently revealed plans to scrap its huge DB scheme that serves 90,000 postal workers.

It says the current final salary surplus would run out in 2018 and, unless changes were implemented, the bill for servicing it could run to over £1bn a year – a level it said would not be affordable.

Such factors have resulted in more requests to the regulators from senior pension experts to allow partial DB transfers. Partial DB transfers enable a level of income security while investment growth continues.

Indeed, it seems unfair to me that those in defined contribution pension schemes benefit from greater flexibility as well as a record stockmarket high in the form of the FTSE 100’s longest run of successive all-time peaks since its 1984 inception.

We are seeing an increase in quality cashflow modelling, guidance provided and planning tools for transfers. This, along with the regulator clamping down on pension scammers, means it is time for those with DB pensions to have the same trust given to them as members of DC pensions – at least to be allowed to enact partial transfers.

Kim North is managing director at Technology & Technical

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Why are we still working with a HRMC valuation of DB benefits at 20 times income plus PCLS?

    Gilt yields have fallen, yet there has been no change in how DB arrangements are valued.

    If we take a logical approach this should be increased to 40 times income plus PCLS. The problem of course being this approach would place many public sector employees over the current £1 million Pension Life Time Allowance, including many MP’s.

    So, a final salaried public sector employee can have a pension of say £40,000 and a £200,000 PCLS. A private sector employee at a £1 million life time allowance purchasing an annuity to secure life time income, indexed at RPI would get around 2.5%, or £20,000 per annum after £200,000 PCLS.

    The system is not fair and only the Public Sector in the main still has these gold plated Final Salary arrangements being funded. The private sector cannot afford them.

    Pension Freedom has been around for over 22 months, yet the update in rules, regulation and requirements is still living in the post era. We will yet again be judged in retrospect, with new rules or guidance being given once the outcome is already known.

  2. John Hutton-Attenborough 24th January 2017 at 9:50 am

    Guaranteed benefits versus transfer value = 1.95% on a scheme I was asked to look at so £100,000 TV would provide £1,950 per annum pension at NRD in 4 years time. 50% spouse pension so if client pops off early the beloved gets £975 for life.
    The promised pension is considerably higher so client sees this as a lottery win (guaranteed!).
    He has no desire to buy an annuity…if he did then the DB benefits would prevail.

  3. And what precisely are “small DB schemes”?

    Do we move the bar from the present 30K to perhaps 60K before regulated financial advice is required from a Pension Transfer Specialist?

    Will client’s be able to judge whether their 60K DB cash equivalent transfer value represents a good exchange for their deferred defined benefits? I think not.

    How many more DB schemes will be taken over by the Pension Protection Fund?

    Will legislation be introduced to further cap revaluation and escalation of deferred DB pension benefits so that those people who don’t transfer, ultimately end up receiving a scheme pension in retirement significantly less then their “pension promise”?

    My personal opinion is that the pension “promise” that is on the table from the DB scheme now will not be the same as the one one available in 10 to 15 years. Time will tell.

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