Clause 14 - Restriction on transfers out of public service defined benefits schemes

Part of Pension Schemes Bill – in a Public Bill Committee at 2:00 pm on 4th November 2014.

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Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 2:00 pm, 4th November 2014

Welcome back to our proceedings, Mrs Riordan. We moved this clause out of sequence because it relates to transfers out of public service pension schemes and more naturally belonged with our discussion of the Budget changes, rather than in our earlier discussion of collectives and other forms of pension scheme and benefits.

The clause would provide for regulation-making powers for the Treasury which would allow it to ban members of defined-benefit public service pension schemes from taking cash equivalent transfer values in such a way that its value is transferred to a defined-contribution pension scheme. Specifically, the clause will enable the Treasury to ban transfers from unfunded public service pension schemes to defined-contribution schemes and schemes providing collective benefits.

I advise the Committee that we intend to bring forward further amendments to the clause on Report to tidy it up in response to the consultation. The amendment will ensure that the ban on transfers from unfunded defined-benefit public service pension schemes to schemes in which the new flexibilities are available is actually made in the Pension Schemes Act 1993 rather than in regulations. That is to give the measure primary force. We also intend to table amendments that will introduce a new statutory requirement for DB schemes to check that all individuals who are transferring to DC have taken advice before transferring.

On the substance, the rationale for a transfer ban is quite clear. After the introduction of changes in 2015, it will no longer be possible for members of unfunded DB public service pension schemes to transfer to schemes from which it is possible to draw down flexibly. The reason is the risk of large cost to the Exchequer. Currently, only a small number of transfers take place out of the public pension schemes to DC schemes. The introduction of the flexibilities may make transfers out to DC schemes more attractive for some. In unfunded public service schemes there is no fund of assets with which to finance transfer payments; instead, they are funded from contributions and general expenditure.

For every extra pound paid out in transfers, the Government will have a pound less to spend that year on public services or would have to borrow the money. We have estimated that if 1% of all public service  workers reaching retirement took their benefits flexibly, it would cost the taxpayer £200 million a year. However, in funded public service schemes, as in the private sector, there is a pool of assets that is used to provide pension payments, so in most cases allowing greater flexibility will have a less direct impact on public finances.

There will be limited exceptions to the ban. We intend to legislate for some limited exceptions and will table an amendment on Report to allow the Treasury to make regulations providing for exceptions. Those would be in limited circumstances—for example, some specific circumstances under the Fair Deal process. We will announce further detail of that in due course.

The clause is consistent with what we have said all along about not applying the flexibilities to unfunded public services DB schemes, and I commend it to the Committee.