The UK government will continue to allow asset transfers between defined benefit (DB) and defined contribution (DC) pension funds despite concerns over the impact on corporate and sovereign bond markets.
The freedom to do so, however, will not be extended to members currently drawing down their DB pensions, while trustees are to be given additional guidance over protecting scheme funding should transfer requests become burdensome.
Concerns began to surface after chancellor of the Exchequer George Osborne announced new freedoms for DC savers, with some in the industry warning that the added incentive for DB members to transfer could hurt DB funding and investment markets.
At this year’s Budget, extra freedoms for DC savers saw the removal of compulsion to annuitise at retirement and the allowance for pension pots to be fully drawn as cash.
Simultaneously, the government closed off the ability for unfunded public sector DB schemes to transfer, while launching a consultation on whether to extend it to the funded public sector, as well as private sector schemes.
This came in response to fears that DB assets invested in corporate and sovereign bond markets might need to be withdrawn to fund transfers.
However, consultation responses from industry groups and actuaries suggested the concerns were overstated, as funds could manage cash flows, transfers would be uncommon and the growing demand for bulk annuities would maintain demand for fixed income assets.
Transfers will be allowed in corporate DB plans and funded local government pension schemes (LGPS).
In line with industry suggestions, the government will make independent financial advice for DB to DC transfers mandatory, with the cost borne by the member in circumstances where the member requests the transfer.
In a statement, the chancellor said the flexibility for DB schemes would, “at the margins”, require greater liquidity in schemes.
“However,” he added, “the main driver underpinning portfolio restructuring in the future is likely to continue to be increasing maturity of defined benefit schemes and corresponding de-risking, irrespective of any decision on defined benefit flexibility.”
The chancellor also said, despite the unlikelihood that transfers will destabilise schemes, trustees would be given more guidance on how to maintain sustainability within schemes, such as delaying transfers and reducing transfer values in ratio to underfunding.
A new consultation will now begin on giving DB members the right to transfer directly out of their schemes, without having to go via a DC platform, something not currently possible.
The chancellor also confirmed the government’s commitment to at-retirement flexibility reforms for DC savers, and said consultation respondents were overwhelmingly in favour for the legislation and for it be in place by April 2015.