In the Budget, the Chancellor announced a package of measures designed to give pension savers in defined contribution (DC) pension plans greater flexibility over how they use their retirement savings. The changes announced have significant implications for the design of existing DC plans and, in many cases, plan rules will need to be amended to enable members to take advantage of the new, more flexible rules.
The proposed changes also have implications for defined benefit (DB) pension plans. The Government intends to take action to prevent large scale transfers from DB public service pension plans to DC plans and it may apply similar restrictions to private sector DB plans. In addition, trustees of DB plans may need to update their plan’s rules to allow members to take advantage of the new overall trivial commutation limit, which will apply from 27 March 2014, and, where relevant, to allow members with DC additional voluntary contributions (AVCs) to take advantage of the new flexibility around how they use their DC fund.
This speedbrief examines the actions that Trustees of DC and DB plans and pension providers need to take in light of this week’s Budget. Click here for a summary of the changes to the pensions tax rules announced in the Budget.
Defined contribution plans
Trustees and pension providers that run DC pension plans (or DC sections of hybrid pension plans) need to take the actions set out below in response to the changes announced in the Budget.
As a priority, trustees and providers need to decide whether they want to allow their members to take advantage of the more flexible rules around flexible drawdown and trivial commutation that will apply from 27 March 2014. If they do, they will need to review and, where necessary, amend their plan’s rules to allow this.
By April 2015, trustees and providers need to decide whether they want to allow the members of their plan to take advantage of the new freedom over how they use their retirement savings. In particular, as well as giving members the existing options of taking 25% of their pension fund as tax free cash and/or using their fund to buy an annuity, will they also give members the option to:
- take all of their pension fund as cash; and/or
- drawdown their pension fund in instalments from the plan, whilst leaving the balance invested.
If trustees and providers want to allow this flexibility under their plan it is likely that rule amendments will be required. Alternatively, trustees and providers could require members who want to take advantage of these new options to transfer their benefits out of the plan. However, any trustees and providers thinking of adopting this approach should be aware that the Government is consulting over whether the new tax rules should override plan rules. They also need to consider the interests of their members and how members might react if they are not given these options, which have received widespread media coverage.
Trustees and providers also need to put in place a process to ensure that members are offered free and impartial face-to-face guidance on their retirement choices in accordance with the Government’s “guidance guarantee”. The Government is consulting on precisely what this will entail.
Trustees and providers will also need to communicate with their plan members about their new options at retirement.
Defined benefit plans
Although the changes announced in the Budget primarily relate to DC pensions there are also implications for DB pension plans. Some of the key implications are set out below.
The Government is planning to ban transfers from public service pension plans to DC plans (except in very limited circumstances) because of the cost to the taxpayer if a large number of members of unfunded public service pension plans request to transfer out. The Government is also considering applying a similar restriction to transfers from private sector DB plans, primarily because of concerns about the impact on financial markets of capital flight from DB plans to DC plans.
Trustees and sponsors of private sector DB plans should monitor developments in this area and be prepared to respond accordingly. If the Government decides to ban transfers from private sector DB plans, plan rules may need to be amended to reflect this. Alternatively, if transfers are permitted, they should consider the potential impact on their plan’s funding position and on their plan’s investment strategy.
If the sponsor and trustees of a DB plan are intending to carry out a liability management exercise they should consider the impact of the changes to the tax rules on their proposed strategy and on the communications to members.
The new £30,000 overall trivial commutation limit that is being introduced from 27 March 2014 will apply to DB plans as well as DC plans. Trustees of DB plans may need to amend the rules of their plan to allow members to take advantage of this.
Finally, trustees of DB plans under which members can build up DC funds by paying AVCs, will need to take the actions outlined above for trustees of DC pension plans.
The changes announced by the Chancellor in the Budget represent the most radical shake-up of DC pensions for a generation and they have implications for both DC and DB plans. Trustees, pension providers and sponsors of DC and DB plans need to take steps quickly to understand the implications of these changes for their plan and decide how they are going to respond to them. They will also need to take action to update their plan’s rules if they want to enable their members to take advantage of the new, more flexible tax rules, some of which will apply from 27 March 2014.