Government to stop public sector pension transfers to stop ‘mass exit’

The chancellor, George Osborne has announced the new proposal which states that the public sector pension members shall be banned from transferring out of their defined benefit scheme.

Reports say that, after Osborne publicized a drastic renovation of the UK pensions framework most of the public sector workers started moving out of DB scheme for a defined contribution (DC) so to avoid this huge flow, the ban has been introduced by the government.

Main reason for the people showing interest in DC is that anyone who is aged 55 or above can take their entire fund as cash as per the improvements made in DC and are subject to be effective from April next year.

As per the Budget documents: “Having considered this carefully, the Government intends to introduce legislation 
to remove the option to transfer for those in public sector schemes, except in very limited circumstances”.

“Whilst the Government would in principle welcome the opportunity to extend greater choice to members of private sector defined benefit pension schemes, it will not do so at the expense of significant damage to the wider economy”.

“Funded defined benefit schemes play an important role in funding long-term investment in the UK economy, which the Government does not want to put at risk”.

“The Government’s starting point is therefore that, whilst in principle it would like to permit transfers from private sector defined benefit schemes under the new freedoms, it will only consider doing so if the risks and issues around doing so can be shown to be manageable.”

It would cost the Exchequer £200m if just 1 per cent of public sector pension members transferred out as per the treasury estimates.

Andy Tully, MGM Advantage pensions technical director says: “Not being able to transfer is a significant restriction for members of public sector DB members. I imagine the Government will come under pressure from members and unions to provide them with greater flexibility”.

“This looks like an attempt to prevent a mass exit of members into the now more flexible DC arrangements.”

Robert Reid, Syndaxi Chartered Financial Planners managing director says: “Many high earners, particularly in the health service, will see this as an attack on their ability to take their benefits in a format that they have more confidence in than that provided by the Government.”

To limit the transfers out of private sector DB schemes, the Government is looking for more options. Few of them are listed below.

  • First and fore mostly, government is removing the right of all members of DB schemes to transfer to DC schemes;
  • Secondly, continuing to allow members of DB schemes to transfer to DC but requiring that any funds which have been transferred are ring-fenced by the receiving pension scheme and subject to the existing DC tax framework;
  • The policymakers are in view of placing a cap on the amount that people in DB schemes can transfer to DC schemes each year;
  • Continuing to allow transfers but requiring that any transfer to a DC scheme must be approved by the DB scheme trustees before it can be made;
  • Leaving in place the existing flexibility for members of private sector DB schemes to switch to DC schemes