Paul Leatherbarrow, Liverpool
Contracting out for defined contribution schemes will be abolished on 5 April 2012
Sro there will be no forced separation of protected and non protected rights benefits. All defined contribution funds will be treated the same by legislation. One of the consequences is the potential ban on transfers of contracted out defined benefits rights to defined contribution schemes. After this date defined benefit schemes will be locked in and will not be able to take advantage of defined contribution schemes such as taking control of their pension investments or exploring the new flexible retirement options the government is proposing o A ban on defined benefits to defined contributions also limits employers options to manage their defined benefit liabilities.
Defined benefit members will have the option to transfer to other defined benefit scheme or a section 32 policy. Most defined benefit schemes have not accepted transfers for many years mainly due to cost. The pension regulators believe defined benefit scheme to defined contribution schemes are not normally best for the member
Defined benefit offer fixed benefits if in ill health, so you may want to switch to get impaired or an enhanced annuity, to secure greater death benefits which means therefore greater protection for their family. Single people will get better income from defined contribution. Defined contribution will allow you to consolidate small pension pots, Have greater control over your investments, and also can have drawdown while still invest the remaining fund.
Final salary plans force employers to go down with the sinking ship
Under the department for works and pensions proposals, workers who know their employer is in trouble will go down with a sinking ship. And watch their pensions go the same way if this legislation is enacted it is mostly advisable for most final salary scheme members to stay in their scheme in some cases it can make sense to transfer out
The government is proposing to abolish the right of about 8 million pension investors to take control of their own pension by axing the right to contract out of the state second pension into a money purchase scheme
The other potential problem is a fire sale whereby a rush of transfers may happen by scheme members to defined contribution arrangements even though this may not be in their interests
Also this means can not use flexible drawdown schemes
Also some final salary pay less than the 25% lump sum at present can transfer to money purchase to achieve larger lump sum
Some facts and figures
• 50% of all workers believe the quality of a company pension is an important factor when applying for a job.
• 43% of employees in company schemes are final salary
• just under 50% of over 50s were in final salaries compared with 29% of people under 30
• just under 50% under 50 said they were not doing enough to prepare financially for retirement
• further 40% believe companies who provide pensions should provide financial advice and bear the cost which shows people want financial advice but are not prepared to ay for it this shows that despite the death of the final salary due to affordability and sustainability people are still reliant on company pensions and believe they will be sufficient.
• Department of works and pensions survey shows that the % of private sector companies providing some form of pension provision declined since 2007 from 41 to 28%
• Only 9% of non-providers expected to introduce pension provision in next five years, reasons 32% too small 15% too costly 13% staff not want it SHP still most common
• Most employees want to do their own provision as employers will not contribute they feel personal pension scheme outweighs company scheme
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