What is a Section 32 Buy Out Plan Pension?

To understand what a Section 32 Buy Out Plan is, we must look back to state pensions history from the 1970s and company pension scheme rules.

SERPS

In 1975, Barbara Castle MP introduced a second tier of state pension called the State Earnings Related Pension Scheme (SERPS).  SERPS started in 1978 and was a top up to the old basic state pension (sometimes called the old age pension). 

When you pay national insurance contributions (NIC), part of your NIC payments give you a credit towards your main state pension.

At the time, additional NICS (from you and your employer) were also allocated for you to build up your 2^nd tier state pension SERPS.  In short, we all had two state pensions.

To much fanfare in 2016, the government announced a new, higher NEW state pension for all.  What was not headlined was that we all lost our credits towards the 2^nd tier state pension.

Contracting Out of SERPS

Your company pension scheme was allowed to contract you out of SERPS meaning that part of your NICs that would have been paid to your SERPS scheme was then redirected into your company pension scheme funds on the basis that this subsidised/reduced the costs to the employer to run the company pension but also had to offer an underlying guarantee to at least match what you would have received from SERPS.  This was called a Guaranteed Minimum Pension (GMP). 

Many of you will have company pensions that contain figures for pre 1988 and post 1988 GMP (this is equivalent of the SERPS and tells you that your company pension scheme was contracted out).

Buy Out Plan

The costs to run company pension schemes have been a huge burden on employers, particularly defined benefit/final salary schemes were extremely costly with many employers such as Austin Rover, British Steel and more recently BHS going into liquidation or having to find a buyer (with government support) due to pension liabilities.  Many companies made the decision to close their pension schemes by using a bulk ‘buy out’ scheme where they technically paid a big pension company such as Legal & General £millions to take on the pension scheme liabilities for all employees and close it down.  A bulk ‘buy out.

Section 32 Buy Out

Section 32 of the Financial Act 1981 introduced the ability for your company pension benefits to be ‘bought out’ individually by the pension scheme trustees i.e., a pension scheme in your sole name rather than a bulk buy out scheme.

• Pension transfers to S32 policies were investment linked only, so there were no guarantees carried over from your main company pension benefits.
• The only proviso was that if your company pension scheme had GMPs (from being contracted out of SERPS() then the S32 Buy Out policy must also take on the same underlying guarantees for GMP.
• You may see on your pension statement Pre 1988 and Post 1988 GMP.
• The problem with S32 Buy Out policies was that if your non-GMP or Excess over GMP pension fund does not grow enough to cover the ever increasing index linked GMP (SERPS) part, then there may not be enough money to cover the GMP and thus the pension company is ‘lumbered’ with the scheme as they must honour the GMP, so a transfer out is impossible as no other pension company would take on the pension transfer if fund was not big enough to cover the GMP liability.
• If there is no GMP in your S32 Buy Our policy, then these can usually be transferred to another annuity or flexible drawdown or cash in without problem.
• If there is GMP and there is enough money in the pension fund to cover the GMP liability then a transfer out will be achievable, but it is treated in the same way as you are giving up a guaranteed, defined benefit pension scheme.  This means it will be expensive and not all advisers (including us) now offer this service.
• If there is not enough money in your pension fund to cover the GMP liability, then a transfer out will not be achievable.

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