British companies are making big cash offers to workers to move their pension liabilities off their balance sheets.
If you have a defined benefits scheme which gives a guaranteed pension income plus benefits, the question is do you take the money and run or stay with the scheme?
For companies, shifting the liability to workers or an insurance company ready to take on the risk is a good move as cash is freed up for expanding the business rather than funding the retirements of former employees.
However, City regulator the Financial Conduct Authority (FCA) is tightening up the rules on transfers because it feels switching out of a direct benefit pension fund to a defined contribution fund is rarely beneficial to retirement savers.
Defined benefit schemes often come with extra benefits, like guaranteed annuity rates that are double or treble the commercial rates currently available on the market.
Cash offers
To press the point, the FCA has launched a consultation proposing anyone wanting to transfer a defined benefit pension has to take professional advice before making the switch.
Some pension funds are offering members sums of around £900,000 in return for taking a £30,000 a year pay-out off their books.
New pension freedoms are also prompting the rush to offer cash to leave a scheme as the rules starting in April exclude defined benefit schemes.
“Pension savers will soon have a lot more options,” said an FCA spokesman. “A lot of defined benefit savers will be eyeing those with defined contribution funds with envy and may be considering making the switch to join them.
“The FCA believes anyone giving up a defined benefit scheme should be fully aware of what they are doing and how the financial consequences can affect their retirement incomes.”
Transfer window closing
A recent study by pension consultants Hymans Robertson suggests around a third of defined benefit members might move to a defined contribution scheme if they can.
“That adds up to around 100,000 people,” said the firm’s Jon Hatchett.
“That comes from talking to 100 large employers, but as the market opens up this number could easily grow.”
For savers in defined benefit schemes, the window is open to transfer under the current rules, which do not require the receiving scheme to see proof that the switch comes with a professional recommendation.
If the FCA decides to impose restrictions on transfers, the new rules are likely to start from June 2015.
