Schedule 3 - Early leavers: transfer values

Part of Pension Schemes Bill – in a Public Bill Committee at 2:15 pm on 28th October 2014.

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Schedule 3 to the Bill makes changes to the general rules about transfers from one pension scheme to another (for reasons related to the new definitions in Part 1). This amendment makes similar changes for cases where benefits are derived from pension sharing on divorce.

Schedule 3 amends chapter 4 of part 4 of the Pensions Schemes Act 1993, which sets out provisions governing how members of an occupational or personal pension may apply for, take and use the cash equivalent value of their rights in the scheme and how that transfer value is to be calculated. In this section of the Bill we are saying, “Where you have a pension scheme, you need rules for what happens when people leave and rules for the terms on which you can transfer out. What do those rules look like for DA, DB, DC and so on?” We are trying systematically to go through all of the things that pension schemes need legislation about and setting that out. We are on to transfer values at this point.

The existing provisions provide for two ways to calculate and give effect to transfer rights. If the rights are to money-purchase benefits, the transfer value is the realisable value of the members’ rights in the scheme on any given date. This will be the product of contributions and investment return less any charges. For salary-related benefits, the situation is more complex, as trustees have to convert a promised benefit into a cash equivalent. Trustees are required to give the member a guaranteed cash equivalent that is valued for a prescribed period of time.

The schedule amends existing legislation to reflect the new scheme categories defined in part 1 of the Bill and to take account of collective benefits. Under the  changes there will still be the same two methods to offer a transfer value. Members of defined-benefits schemes, members of shared-risk schemes and members of defined contribution schemes that provide benefits other than money-purchase benefits will get a guaranteed cash equivalent. Members of a defined contribution scheme providing only money-purchase benefits will get the realisable value of their assets. As now, the details about how trustees and managers calculate a cash equivalent will be described in regulation.

The key point here is that the policy for transfers remains unchanged as a result of the new scheme categories. We are making sure that the current transfer provisions apply appropriately when the new scheme definitions introduced in part 1 of the Bill take effect. We will retain the two basic methods and apply first, a cash equivalent method for benefits under DB schemes, DA schemes and collective benefits under DC schemes—effectively the same as the current salary-related requirements —and a realisable value method for benefits under DC schemes other than collective benefits, effectively the same as the current money-purchase requirements.

This will bring all DA or risk-sharing schemes within the scope of section 93A of the 1993 Act—the right to a statement of entitlement—but we can use the regulation-making power in section 93 to exclude schemes of a prescribed description, in prescribed circumstances, if we need to, in respect of any particular models where it might not be appropriate. As now, we can modify how the law applies in relation to schemes, where not all the benefits are money purchased, so that we can apply a realisable value method for money-purchased benefits in any type of scheme.

The amendment makes similar changes to the legislation about transferring the pension credit benefit. As with transfers for ordinary scheme rights, the policy for transfers of pension credit rights remains unchanged. The existing rights to a transfer continue to apply to all benefits, including rights accrued in shared risk schemes and schemes providing collective benefits. The amendment inserts the new definitions to make it clear that a pension credit member in any of the new categories of schemes will have the same rights as current credit members to transfer their pension credit benefits and that these rights will also apply in schemes which are for collective benefits. In simple language, we are taking the current rules about rights to transfer, working out what they should look like in each of our new categories of pension schemes and broadly replicating the current approach in a fairly intuitive way. I commend amendment 5 to schedule 3.