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HR News Update – Compulsory DB transfer advice is a step too far

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The Treasury announced that DB scheme members will be required to take advice before they are allowed to transfer to a DC scheme.

Commenting on the announcement, John Broome Saunders, Actuarial Director at Broadstone, said: “We have no problem with encouraging or facilitating advice, but making it compulsory is a step too far. If the Government really believes in flexibility and choice, they should be brave enough to allow individuals to make their own financial decisions. Since there will be no requirement to take heed of advice given, for many the requirement to take advice will simply be an annoying impediment – and a potentially significant cost – to transferring to a DC scheme.”

Broome Saunders believes that such transfers will become more popular as DB scheme members develop a better understanding of the new flexibilities within DC schemes. “Ask somebody whether they would like access to more of the value of their retirement savings sooner in retirement, and they may well say yes – even if that means losing out on a guaranteed pension for life. Why force someone whose mind is made up to spend money on advice that will probably be put straight in the bin?”

The Treasury also announced that it is going to consider how DB schemes might be allowed to benefit directly from the flexibilities that DC schemes will enjoy from next April. Broome Saunders, commented: “This is great news, especially if it allows DB schemes to offer more innovative benefit options that may be both attractive to members, and which will reduce pension risk for scheme sponsors”. Broome Saunders believes that such options could include larger lump sum payments at retirement, or additional pensions payable for a fixed period of time. “Essentially, this is about accelerating access to retirement savings. Without these options, DB scheme members will be caught between a rock and a hard place – they can stay in their DB scheme, with no flexibility beyond the standard 25 percent tax-free lump sum, or transfer everything to a DC scheme, and lose out on a pension guaranteed for life. Flexibility within DB schemes will provide some welcome middle ground.”

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