Towers Watson has welcomed the Chancellor’s decision not to ban members of funded defined benefit pension schemes from transferring to newly flexible defined contribution arrangements. The firm expects that most members of defined benefit schemes will choose to stay where they are but that more employers will offer members the choice to transfer right up until the point of retirement.
Fiona Matthews, a senior consultant at Towers Watson, said:
“The Government never wanted to antagonise millions of people by trapping them in their current pension schemes. Having been persuaded that its fears about the bond market were overblown, it doesn’t have to.
“We do not expect a big overnight exodus from defined benefit pensions. People will like knowing they have choices, but it is human nature to value what you have and not give it up lightly. Most people will also want to keep their options open and not make their minds up until they are ready to retire.
“Where members do want to swap their pension for a pot of money that they can dip into as they wish, employers won’t complain. Transfers are a cheaper way of getting pension liabilities off a company’s balance sheet than paying an insurer to take responsibility for the pension payments.
“We expect that more schemes will now allow members to transfer out right up until the point of retirement, rather than requiring them to make their minds up a year beforehand. Guesses about how many people take up these options will then affect everything from deficit recovery agreements to the pension liabilities disclosed in company accounts.
“The Government sees compulsory financial advice as the first line of defence against any hint of mis-selling when people transfer out of Defined Benefit pension scheme. It will take a keen interest in this advice, and the FCA has already signalled that some advisers need to raise their game.
“In practice, advice was already more or less compulsory because pension providers would not accept transfers without it. Advice costs several hundred pounds a time, so many defined benefit scheme members won’t explore their options unless the employer pays for this. This will also put pressure on financial advisers to find more efficient ways of delivering advice, especially for smaller pensions that are worth a little more than the £30,000 cut-off point for advice.
“People with local government pensions will be allowed to transfer but members of unfunded public sector schemes have seen the exit door slammed shut. In the short term, this means that the Government does not have to borrow money to pay out transfer values. In the long term, however, it would be cheaper for taxpayers to pay back this debt than to pay the pensions.”