Chancellor George Osborne is set to stop public sector workers and civil servants from enjoying the same relaxed pension rules that he is granting everyone else.
In the wake of his Budget 2014 overhaul of defined contribution pension drawdown, Osborne promised to release details about how the government planned to handle defectors from final salary or defined benefit pensions.
However, the announcement he has made is not the news public sector workers and civil servants wanted to hear.
“Having considered this carefully, the government intends to introduce legislation to remove the option to transfer for those in public sector schemes, except in very limited circumstances,” said Osborne.
“While the government would, in principle, welcome the opportunity to extend greater choice to members of private sector defined benefit pension schemes, it will not do so at the expense of significant damage to the wider economy.
Risks and issues
“Funded defined benefit schemes play an important role in funding long-term investment in the UK economy, which the government does not want to put at risk
“The government’s starting point is therefore that, while in principle it would like to permit transfers from private sector defined benefit schemes under the new freedoms, it will only consider doing so if the risks and issues around doing so can be shown to be manageable.”
The Treasury has calculated that every 1% of public sector pensions transferring out to defined contribution or Qualifying Recognised Overseas Pension Schemes (QROPS) would cost the government £200 million.
The Chancellor has to bring in new laws to stop public pension money flooding out of the system into defined contribution pensions because he fears the outflow will undermine public finances.
Osborne’s options
In many cases, public pensions are paid from contributions of current workers topped up by tax revenues, so if billions of pounds of pensions were suddenly transferred out, the Treasury would have to find the money to pay retirement savers out of cash earmarked for spending on schools, health and other public projects.
The Chancellor has a number of options for opening or closing the door on public pension transfers, including:
-
Simply taking away the right of defined benefit members to transfer to defined contribution schemes
-
Letting defined benefit funds go to defined contribution pensions, but making sure money is not drawn under the new rules
-
Capping final salary scheme transfers
-
Leaving current arrangements as they are – but this is unlikely
