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The Actuary The magazine of the Institute & Faculty of Actuaries
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Employers set to widen early access options for DB pension scheme members

Under new legislation, employers are planning to provide their members of final salary pension schemes with new options to access more of their pensions earlier in retirement, according to a survey conducted by Towers Watson. The firm says that new options for members of defined benefit (DB) schemes will be a consequence of less stringent rules on how defined contribution (DC) savings must be used to provide a retirement income.

The Finance Bill, which is currently going through Parliament states that retirees who secure an income of at least £20,000 a year for life will be able to access any additional DC assets as quickly as they like, subject to income tax, whereas previously only limited sums could be drawn down and most people had to use their remaining funds to buy an annuity by the age of 75. State pensions, DB pensions and annuities all count towards the new £20,000 Minimum Income Requirement (MIR) as long as they have started being paid out.

A Towers Watson seminar last week yielded results showing that 34% of employers and pension fund trustees attending expect they will permit members to transfer any part of their DB pension not required to satisfy the MIR to a DC arrangement, with 57% saying they will consider the option and 9% stating that they had no plans to make the facility available.

Paul Kitson, senior consultant at Towers Watson said: "Although these reforms were conceived with DC savers in mind, long-serving members of DB schemes are more likely to meet the MIR and have money left over. Many will want to enjoy the same flexibility as those with substantial DC savings and will ask their schemes to help them do this. They will be knocking at an open door because transfers reduce pension liabilities and the risks to which employers are exposed."

The consultant also said that the reforms make schemes more likely to let members give up inflation-linked pension increases in exchange for a pension which is higher at the beginning of retirement. 54% of seminar attendees said they would not have offered this sort of option without the introduction of the MIR but might now. 24% said they would have allowed members to trade in pension increases anyway and 22% that they still won’t.

Mr Kitson said: "Pensions don’t have to rise with inflation to count towards the MIR. If part of a member’s DB pension would have started at £9,000 and risen with inflation, swapping this for a pension that starts at £13,000 but stays flat might mean that more of their DC savings can be accessed when they want. Not all of the inflation increases promised by DB schemes were compulsory and removing them reduces the amount employers must continue to pay if the member lives longer than expected. However, it is essential that members understand how the purchasing power of their pensions could fall over time; narrowly satisfying the MIR through pensions that don’t keep up with prices won’t be enough for a good standard of living if they survive into their nineties and inflation takes off."

Commenting on the fact that some people have several relatively small DB pensions from different former employers, and may need some but not all of these to meet the MIR, Mr Kitson said: "There could be a first mover advantage for the employer who helps members add up their different pension entitlements and understand their options and then offers them the chance to swap income for a capital sum."

HM Treasury has recognised that "some individuals may wish to transfer money from occupational DB schemes into DC schemes to take advantage of flexible drawdown arrangements", the consultant said, but notes that it "does not expect this to be a popular route for entering flexible drawdown as DB income will be allowed to count towards the MIR. Individuals with sufficient DB and DC income will therefore be able to meet the MIR without transferring their DB income".

Mr Kitson concluded: "The part of a DB pension needed to satisfy the MIR won’t usually be transferred. But where people comfortably exceed the MIR through DB pensions alone, or could do if these were reshaped, it might be a different story."