The abolition of DB transfers?
It has long been understood that the government was going to terminate the practice of contracting out of the State Scheme via the mechanism of protected rights.
However, reading into a rather dry and technical DWP consultation paper1, it emerges that one of the consequences may well be the effective ending of Mrs Thatcher’s “portability” revolution – the effective ending of transfers from (contracted out) defined benefit schemes (DB) to defined contribution ones.
As the vast majority of DB schemes are contracted out, this has very wide potential implications.
Basically, when you take a transfer from a contracted-out DB scheme to a DC scheme (perhaps a personal pension or an occupational scheme of a new employer) your transfer has two parts. These are snappily named “Protected Rights” and “Non-Protected Rights”
The Protected Rights part relates the bit of your pension in respect of contracting out of S2P. The Non-Protected Rights bit is everything else.
Protected Rights includes your GMP (earned before 1997) – plus all pension earned after 19972.
And in a nutshell, you won’t be able to transfer the Protected Rights part of your pension into a DC scheme from April 2012 onwards. In practice, we expect that this means you won’t be able to transfer at all. (It is technically possible that DB schemes could offer to keep the GMP and post ’97 element of pension and transfer out the rest, but we don’t expect many schemes could or would want to do this in practice3.)
Possible Implications
The Pensions Regulator may be happy – no more Enhanced Transfer Value (ETV) exercises to worry about. These will become much less attractive in the future.
More lost benefits - you won’t be able to aggregate your benefits as you change jobs (assuming you were lucky enough to be accruing pension in a DB plan.) Expect an increased incidence of “orphan pensions”.
Income Drawdown – pooling your pensions into a drawdown vehicle when you retire just became harder.
Messy workarounds - There will undoubtedly be creative schemes proposed to overcome this. The much neglected GMP conversion regulations might now get dusted down.
New products - Section 32 bonds may see an upswing of activity and new products may come along to sit beside them.
We may also see an upsurge in activity for transfers to overseas pension schemes.
Conclusion
This is only a consultation at this stage, but we do not expect much to change. Employers considering risk reduction via ETV may wish to act sooner than later – although while the ambiguity over the change to CPI is hanging over us, finding a concrete path may be difficult!
Trustees may wish to consider alerting their members to this possibility in due course, if the transfer window is truly to shut forever.
1 Abolition of contracting out on a defined contribution basis: consultation on draft consequential legislation, issued by the DWP on 28 July 2010
2 This assumes that when GMPs ended in 1997, the scheme continued to be contracted out via the “Reference Scheme Test”. This applies to the majority of schemes. Some contracted out from 1997 onwards via a defined contribution underpin, also confusingly known as the protected rights method..
3Technically, there are other possible options like “Section 32” policies, but they won’t help everyone, and are often perceived to be expensive and of limited attraction.
(We have raised this issue with NISPI and it struck a chord, especially when we raised the point of the EU principle of portability of pensions. NISPI said they would discuss it further with colleagues at DWP. Watch this space.)
