Trusting some of the people some of the time

Alan Collins

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So, there will be no quiet budget for pensions then.  It would seem that Mr Osborne’s rabbit is already out of the red box.  The pretence of “leaks” has been set aside with Mr Osborne confirming some details of this week’s announcements already.

It is therefore expected that individuals will be able to cash in annuities for a lump sum from April 2016 onwards (assuming Mr Osborne and his chums are in situ to make the changes  – that being said, such populist moves are hard for others to ignore and the extension of pension freedoms seems inevitable).  Mr Osborne is quoted as saying:

”It’s all part of trusting people who have worked hard and saved hard all their lives…. By changing the law we are trusting people who have worked hard and saved hard all their lives.”

Some will say people need to be protected from themselves, that the temptation to splurge the cash will be too much and that the long term consequences will be negative.  For now, at least, that argument has been lost.  The upcoming pension freedoms are almost universally popular and I expect the same for the new announcements.

However, in my world (that of defined benefit pensions), it seems that we will be looking in from the outside.  While the details have not been confirmed, the BBC has reported “that the changes would only apply to retired people who had money purchase pension schemes.”

That raises some interesting questions.

  1. An individual annuity policy resulting from a buyout of a defined benefit scheme is surely the same as an individual annuity secured from a personal pension, group personal pension or similar?  As such, surely the proposed extension of pension freedoms cannot differentiate between the two?
  2. If you trust holders of individual annuity policies to spend their own money wisely, then why not extend that trust to members of defined benefit schemes?  To do otherwise is illogical.
  3. If any individual annuity qualifies for the “cash in” option, then it will be easy to circumvent any attempt to prevent defined benefit scheme pensioners from taking advantage of the reforms.  Defined benefit scheme trustees would simply purchase a member an individual annuity which could then be immediately converted by the insurer into a cash sum to be used as the member sees fit.
  4. It is currently prohibited for pensioners of defined benefit schemes to transfer the value of their benefits to an alternative pension arrangement.  Is that really sustainable when other pensioners will be given new options going forward?

The new proposals will further blur the lines between savings and pensions.  It is also unsustainable that a very significant group of pensioners (there are in excess of four million defined benefit pensions in payment) are excluded from these reforms.

Alan Collins

Post by Alan Collins

Head of Trustee Advisory Services at Spence he provides actuarial, funding and investment advice to trustees and sponsors of ongoing defined benefit schemes.

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