Since the Chancellor’s announcement in the March 2014 Budget of a thorough overhaul of the way in which pension schemes operate in the UK, a consultation has been running under the title: “Freedom and Choice in Pensions”. Today marks the conclusion of the consultation which has, no doubt, sparked a healthy, considered and intelligent response from those across the industry. Pitmans LLP’s pensions team welcomes the proposals in general terms, but is looking forward to clarification on a number of key points, in order that trustees and others across the industry are better prepared for their new obligations.
Treatment of Additional Voluntary Contributions (AVCs)
Little has been discussed to date regarding the way in which money purchase AVCs in defined benefit (DB) schemes will be treated under the new pension regime. A key reform set out in the March 2014 Budget is for defined contribution (DC) scheme members to be able to access the value of their pension pot at retirement. It is currently unclear whether members will also be able to access AVC funds in this way. Clarification is needed as to whether the proposed flexibility is intended to apply to AVCs within a DB scheme, in the same way as to other DC funds, on the basis that the DC element forms a separate “arrangement” within the scheme. In particular, is it the Government’s intention to require DB schemes with DC AVCs to meet the proposed DC guidance guarantee to the same degree as a pure DC scheme?
Chris Netiatis, Pensions partner at Pitmans LLP, says: “Clarification on the way in which AVCs are to be treated under the proposed pension reforms is crucial. A large number of DB schemes we work with have members with AVCs so this is going to be a live and pressing issue for a significant number of members and trustees. If AVCs are to be treated in the same way as a standard DC pot, it is inevitable that amendments to scheme rules and governing documentation will need to be made to facilitate the new structure. Trustees will be keen to better understand how this will affect the way they put pensions into payment so we hope for much more detailed clarification and confirmation on this issue.”
Transfer from DB to DC
Much of the immediate reaction to the Budget announcements has centred on the potential rush of members transferring DB benefits to a DC scheme, so as to take advantage of the proposed flexibility. At the time of the March 2014 announcements the Chancellor made it clear that there would be measures put in place to prevent transfers from public sector DB schemes to DC schemes, except in very limited circumstances. Pitmans LLP feels the next and very relevant question for its private sector clients is what, if any, restrictions the Government proposes to place on private sector scheme transfers.
Chris Netiatis comments: “The danger we foresee is that if all private sector DB scheme members have an unfettered right to transfer to DC schemes, this may result in a funding strain being placed on DB schemes. A rush of members transferring out to DC schemes could have a knock on effect for the covenant strength for many small and medium sized businesses.”
“DB pension schemes play a crucial role in the stability of the UK economy in general. They provide pools of capital used for investment in the wider economy and pension funds are long-term investors in key UK based assets. Mass exodus from DB schemes under these new proposals will damage the strength of these funds and therefore have an impact well beyond the pensions world.”
The promise of face-to-face guidance for all members
Another of the unexpected measures announced in the Budget was George Osborne’s promise that DC scheme members will be given access to “free, impartial, face-to-face guidance” at retirement. There has been much debate about how and when this guidance will be provided, who will do it and how much it will cost the industry.
The Government has pledged £20million to help with the set-up costs of providing guidance with the remaining cost being met by a levy on pension providers due to start next April. Pitmans LLP welcomes the Government’s initiative but many questions remained unanswered.
Chris Netiatis says: “This is, in theory, a good idea and one which could add significant value to members at retirement. However, many questions remain unanswered. How does the Chancellor envisage this guidance being given: individual meetings, group sessions, on line webcam session?
With the look and characteristics of a retiree ever changing what does ‘at retirement’ mean in practice? Without more specific guidance and firm definitions given to what is meant by guidance and when this is given, Trustees will be unable to prepare for this new measure.”
Pitmans LLP is also hoping for a full and clear answer as to when and how the guidance will need to be provided. Trustees are concerned about the impact and potential burden this proposal will have on them and until further information is provided as to who will be responsible for arranging and providing this promised guidance, they will continue to be so.
The conclusion and response following this consultation needs to provide a considerable number of answers and clarification in many areas. Until greater light is shed on how these reforms will work in practice, many in the industry remain apprehensive.