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The road to unintended consequences

David Trenner hopes the Government reconsiders its proposed ban on transfers from DB to DC schemes.

Back in the early 1980s, advising clients on pension transfers was relatively easy.

Transfer values were based on gilt yields and most deferred pensions really were frozen, so transferring was a bit of a no-brainer in a number of cases. To make it easier, there was really only one product type you could transfer into – a section 32 buyout.

Then along came complexity. From 1988, you could transfer into a personal pension, which might give more investment flexibility but if there was a guaranteed minimum pension from contracting out of Serps it had to become protected rights.

Personal pensions could pay 25 per cent of the non-protected rights as tax-free cash at retirement, which might be more or less than s32s, and personal pensions could pay all of the non-protected rights fund as cash on death, which might be better or worse than the four times salary permitted by the s32.

Then in 1997, GMPs were replaced by the reference test which was so complex that it was decided that all post-1997 benefits would be treated as protected rights.

2006 heralded simplification. All plans could only pay 25 per cent tax-free cash, unless they qualified for something called bulk transfer protection – with the word “bulk” being redefined to mean “at least on” – so s32s became largely redundant.

By now, many schemes had changed their transfer value basis and the resulting critical yields were often too high to recommend transfer anyway.

So the actuaries introduced the idea of transfer incentives. These allowed employers to offer members cash payments, which at first were tax-free, or increases to the transfer value to encourage people to transfer out.

Logically, if your employer wants you to transfer out to save it money, you should not. But the idea of cash in hand rather than a pension many years down the road appealed to members, particularly when the Pension Protection Fund was bandied about as the likely alternative if they did not transfer.

Then along came the current Government. The switch from retail price index to consumer price index for statutory schemes such as local government and the civil service has meant that no one can calculate transfer values for these schemes for some months at least and also makes it difficult to advise members of other schemes – will the scheme switch to CPI? And if it does, are we sure that CPI will be lower than RPI? And will transfer values fall, so should we take them now before they do?

But perhaps the most significant change is due to come in 2012 and will arise from something put in place by the previous Government – the abolition of protected rights.

Since transferring to a personal pension from a contracted-out salary-related scheme requires the contracted-out benefits to be converted to protected rights, it follows that abolishing protected rights could lead to an abolition of transfers to personal pensions from final-salary schemes. Talk about unintended consequences.

Am I concerned about this possibility? Frankly, no. Common sense says that a simple solution will be found to the problem. Just as last year when safeguarded rights were abolished and transfers from a former spouse’s GMP just became non-protected rights, the same thing could happen for transfers after 2012.

Then again, this requires common sense from Government, so maybe we should all go out and start selling final-salary pension transfers as hard as we can in case they do disappear.

David Trenner is technical director at Intelligent Pensions


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. “Sell” final salary transfers? No thanks, I’ll do what I’ve always done. I’ll tell my clients the pros and cons of retaining their final salary benefits versus transfer to an individual arrangement, and if it is not clearly in their interests to transfer (and the critical yield is only one aspect of that) I will not recommend a transfer.

    Talk about a return to the dark ages!

    Here’s a tip: charge for the advice, not the outcome. We cannot control what legislative changes may be around the corner for final salary transfers but let’s not confirm our regulators worst fears, shall we?

  2. per my previous comment submitted, i think i may have one too few “nots” in there…but my computer sent it before i could recheck. i mean to say if it is NOT clearly in my client’s interest then I will NOT recommend a transfer. can you amend or else delete my post?!

  3. David Trenner - Intelligent Pensions 10th September 2010 at 2:28 pm

    Caitlin, We charge clients for the advice, but I suspect that there are some advisers out there who still take 4% or more as commission.

    Did it not occur to you that my final paragraph might have been just a tad tongue in cheek?

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