Partial DB pension transfers expected to boom

In Industry Insights by woateam

The number of defined benefit pension schemes offering partial transfers could increase after they have converted their contracted-out benefits, a consultant has said.

In a paper published last week, Ryan Markham, head of member options at Hymans Robertson, stated that removing guaranteed minimum pension benefits through conversion “will remove administrative complexity,” which would ultimately allow pension schemes to offer partial transfer values.

He said: “For some schemes, particularly those with lots of long-serving members, partial transfers could be a really attractive option for both members and schemes.”

A partial transfer is when some of the value of the DB scheme is transferred to a defined contribution pot while some DB rights are kept behind.

Pension funds are not legally obliged to offer partial transfers, but trustees can choose to do so and recent research from Royal London and LCP showed 86 per cent of financial advisers were in favour of more partial transfers, many stating greater flexibility in retirement planning as their main reason.

The issue with contracted-out benefits stems from a ruling from the High Court last October, which stated that the Lloyds Bank scheme trustees must equalise benefits between women and men who have GMPs.

The ruling was considered a solution for a pension problem spanning almost three decades, and schemes are now having to decide how to equalise the contracted-out benefits of their members.

There are several ways to do this, but the route of conversion is seen as a clean-cut approach and believed to be the preferred route for trustees and sponsors.

This allows a scheme to convert its GMPs either for an individual member, a group of members, or the whole scheme into other scheme benefits.

Mr Markham noted schemes will be able to provide greater choice to their members while progressing through benefits conversions, while this will also be a “chance to remind those with small pensions of the option to take a lump sum”.

He said: “Whilst writing to members on GMP equalisation and conversion, it might not take much extra effort to remind members of this option. This will help tidy benefits up whilst giving valuable choice to members.”

Savers over the age of 55 are allowed to take the whole of their pension as cash, as long as the value doesn’t exceed £30,000 in total.

This option, known as trivial commutation, is also available for savers over the age of 55 where one of their pensions is worth less than £10,000, with the limit of cashing out three of these pots.

However, members of DB schemes who haven’t equalised their contracted-out benefits have been stopped from using this flexibility.

If you would like some advice relating to a DB pension scheme, please contact us on 0191 384 1008 or by emailing cbreward@wealthofadvice.co.uk