Pensioners Defined Benefit Schemes At Risk

Pensioners Defined Benefit Schemes At Risk.

The Government has this week issued its response to the consultation on pension transfers for defined benefit schemes that are in financial difficulty and published its report:  The Contracting-Out (Transfer and Transfer Payment) (Amendment) Regulations 2017.

In short, from July 2017, the pensioners (i.e. people who are already having their pensions paid to them) of a contracted-out defined benefit scheme will be able to transfer pensioners to schemes that have not or never have been contracted out, with the pensioners consent of course.

What is contracting out?

From the 1970’s through to 2012, part of your national insurance contributions was used to pay for a second tier of state pension, it used to be State Earnings Related Pension Scheme (SERPS) and then became the State Second Pension (S2P), neither should be confused with the Basic State Pension, the SERPS/S2P was a top up to that.  Both private pension schemes and company pension schemes were allowed to contract out.  This means that part of your national insurance contributions were paid to your company pension and they used it to subsidise the costs of running the main company pension scheme.

Part of the deal, particularly with defined benefits schemes, was that they had to offer a pension which was at least equivalent of SERPS/S2P for the national insurance contributions received.  This is known as a Guaranteed Minimum Pension (GMP).

So, why all the changes?

Why have The Contracting-Out (Transfer and Transfer Payment) (Amendment) Regulations 2017?

The simple answer is guarantees.

The Government has very cleverly dumped all of its own requirements to support these guarantees onto pension schemes themselves and they simply cannot afford it.

• For Pre 1988 GMP pensions being paid, there are no increases funded by the employer.  The State then gives an extra top by inflation added to your state pension payments.

• For Post 1988 GMP pensions being paid, there is a requirement by the employer to increase payments by 3% per annum and again the State then gives any extra top to inflation added to your state pension payments (if inflation was higher than 3%).

• Before April 2016  the Government did full inflation top on pre and post GMP and this has now stopped as the new flat rate state pension takes over.

• In addition, from 1997 the employer scheme is required to increase pensions in payment by Limited Price Indexation (LPI) which was the lower of 5%/RPI and is now the lower of now 2.5%/RPI.  This is called Post 97 9.2(b) rights.

Either way, many defined benefit scheme members currently have the luxury of inflation protected pensions in payment.  Given that inflation is increasing, there is ever increasing pressure on large company pensions that they simply cannot afford.  The reality is that employees get better pensions than what they have paid for.

New Regulations - Bye, Bye Pension Increases?

The new regulations will allow schemes that are in difficulty and are in negotiation with the Pension Protection Fund (the compensation scheme).

The reality is that schemes will be allowed to transfer your pension (with your permission) to pension schemes that have not been contracted out and even scheme that do not offer a spouses pension benefit.  Now schemes can ‘dump you’/transfer you thus reducing the burden on the PPF and also schemes may be encouraged to wind up.