Dalriada’s Adrian Kennett looks at what’s to come after the government’s ‘clear statement of intent’ on reform
Earlier this week, the UK government gave its response to the consultation paper ‘Freedom of Choice in Pensions’, which signals a clear statement of intent to the UK pension sector that big changes are on the way. The response from government is effectively saying it’s “full steam ahead” in terms of implementing the proposed changes initially set out in the chancellor’s Budget in March.
Trustees and employers must now get their houses in order quickly, as this clear response enables them to finally start to prepare for the upcoming changes in 2015 with a degree of confidence.
Defined benefit (DB) to defined contribution (DC) transfers will remain possible in the private sector and funded public sector, subject to members taking regulated independent advice – if they have a pot size of more than £30,000 (€38,000).
Planning for the forthcoming changes needs to cover a number of aspects, including communications. If they have not yet been contacted, members approaching retirement should be notified of the increased flexibility. Overall, communications should start to be considered for all members over 55, as well as those nearing that age.
Data-gathering issues are another important consideration that should raise challenging questions for scheme managers such as what proportion of their deferred membership are over 55 or are approaching 55 in the near future; how big are their funds; what proportion will be able to take advantage of the revised trivial commutation limits.
A potentially significant number of transfer out quotations may be sought from DB schemes next year, so scheme managers must also assess if they are suitably geared up for this in administrative terms and whether they have the capability to handle such volumes. Do they have all the data, including AVC fund information, to enable them to do so? Trustees must also consider the Guidance Guarantee. Though this is provided by external parties, they will be duty bound to signpost the availability of the guidance and need to put in place the required administrative procedures to cover this.
Given that the time horizon over which a proportion of members will receive their benefits will change, it is likely to have a material impact on investment strategy, and revisions may need to be considered. A significant amount of cash may be required next year, for example, as the block of those aged over 55 suddenly become able to take their benefits flexibly.
Finally, scheme managers need to take a watching brief as to whether the consultation will ultimately provide flexibility through DB schemes rather than necessitating a transfer out to a DC scheme beforehand. Keep an eye out for product developments in the provider market that emerge in response to new legislation such as the flexibility to take cash from a pension at any point following the purchase of an annuity rather than having to wait until retirement as required by the current rules.
Adrian Kennett is director at Dalriada Trustees