Budget announcements will throw DB scheme governance into a state of flux, says Spence

Marian Elliott

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Spence & Partners, the UK pensions actuaries and administration specialists believe that, in opening his budget briefcase, George Osborne has unlocked Pandora’s Box for occupational pension schemes and has thrown the governance of DB schemes into a state of flux.

Marian Elliott, Head of Trustee Advisory Services at Spence, commented: “The Government recognises the risk of members transferring out of DB schemes into DC schemes and is looking at a range of possible restrictive measures.  The impact of the announcements for DB schemes depends almost entirely on the outcome of the consultation regarding the restriction of transfers between DB and DC Schemes.“In the interim, while we wait for the outcome of the consultation, members and employers essentially have a window where transfers from DB to DC schemes are allowed.  We don’t know whether this window will close and therefore this uncertainty might prompt the very action that the consultation is being designed to avoid:

  • Employers who had been considering liability management exercises, especially those involving the offer of transfers from the DB scheme to a DC arrangement, may accelerate their plans on the basis that this option is now likely to look attractive to members – once they have transferred to a DC scheme, they will have the flexibility to draw their benefits as cash from age 55.
  • Members may well consider their options in the face of potential restrictions being imposed following the consultation and we could see a ‘run’ on DB schemes as members opt to transfer out before the ability to do so is potentially restricted.”

Elliott continued: “This potential for significant transfer requests requires trustees to immediately consider their transfer value basis and whether the assets of the scheme are sufficient to meet the liabilities, should a significant proportion of members opt to transfer out in the short term. Where the scheme is not fully funded on a transfer value basis, trustees will want to consider restricting transfer values and should also engage with the employer to agree whether any funding top ups can be expected should a significant volume of transfer requests be received.”