Fraser Sparks, pensions partner at Stephenson Harwood, has commented on defined-contribution (DC) occupational pension schemes and decumulation.
Commenting on the government starting its consulation on implementing total flexibility in the way that individuals draw on their DC pension savings, Sparks said that if the government’s proposals are implemented, there will no longer be any requirement to purchase an annuity or any restrictions on drawdown arrangements.
Sparks added that the aspect of these proposals that has perhaps not been discussed so much is the government’s suggestion of a ‘statutory override’, which would be used ‘to ensure that pension scheme rules do not prevent individuals from taking advantage of increased flexibility’.
Regarding the government’s apparent contemplation to force occupational schemes to provide a drawdown option from within the scheme, Sparks said that this ‘would be new territory for the vast majority of DC occupational pension schemes’ and that it may encourage employers to move away from having their own DC occupational pension scheme towards either a master trust arrangement or a group contract-based arrangement.
He added: ‘There has been much talk recently about the risk of smaller pension schemes providing worse member outcomes than larger schemes and maybe this is a way in which employers will be encouraged to “ditch” their small schemes.’
Sparks called the ‘guidance guarantee’ — which will require trustees of DC occupational pension schemes to ensure that members will be provided with ‘free and impartial face-to-face guidance on their choices at the point of retirement’ — an ‘interesting point’, asking ‘what is the “point of retirement”?’
He continued: ‘If that is the date the member wishes to bring his DC pension into payment in some shape or form, it seems a bit late to provide the member with guidance about how best to do this only at that time; the guidance would obviously be more useful in the run-up to that date so that the member can consider his or her options and decide what approach to take.
‘Added to which, it is becoming less common for individuals to have a defined “point of retirement” and, even if they do, it might not be the same as the pension scheme’s normal retirement date.
‘If a member of a DC occupational pension scheme is thinking about accessing his or her pension savings at a date other than at the scheme’s normal retirement date, the trustees might find it difficult to comply with a duty to provide the guidance guarantee in the run-up to that date unless members are required to give advance notice of that date to the trustees.’
In addition, Sparks has commented on the proposed new flexibility regarding DC pension savings, which has led to the government considering introducing restrictions to prevent members transferring from defined-benefit (DB) schemes into DC arrangements.
He said: ‘If you are considering an enhanced transfer value exercise in relation to your DB scheme, you had better get on with it as this option might fall away from April 2015, unless, of course, your members are lucky enough to find a DB scheme that is willing and able to accept the transfer.’