DWP hopes contracted-out transfers will smooth BHS deal

Schemes that were formerly contracted out of the additional state pension will now be allowed to transfer liabilities to schemes that have never been contracted out, but only if they are in the Pension Protection Fund assessment period or in talks over a regulated apportionment arrangement.

The new rules are the result of a two-week consultation, issued by government after demands from the industry involving unnamed schemes.

However a spokesperson for the DWP hinted at the political pressure behind the move.

“These regulations will ensure that, if necessary, contracted-out scheme members are able to transfer their pension quickly and protect their benefits,” the spokesperson said. “For example, members of the BHS scheme will be able to take advantage of the deal negotiated between the Pensions Regulator and Sir Philip Green.”

In reality, the extent to which pensioner members could be adversely affected by this is pretty marginal

Tim Middleton, Pensions Management Institute

Respondents criticised the hasty nature of the process and the scope of the regulations, but no concessions were made in the final regulations.

With the end of contracting out of the second state pension in 2016, schemes that had previously done so were only allowed to transfer liabilities to another scheme that had also formerly been contracted out of additional state pensions.

In effect, this prevented those schemes from making transfers into a new scheme, which posed problems for sponsors and trustees attempting to restructure their benefits, with member consent, to avoid insolvency.

Sensible, but not perfect

With just two weeks in which to respond to the consultation, only 11 responses were received on the draft regulations.

However, while respondents broadly agreed that the proposal was sensible, concerns were raised about technical issues, and about the scope and impact of the regulations.

Indeed the impact may be quite limited, said Tim Middleton, technical consultant at the Pensions Management Institute, as pensioner benefits are largely protected if a scheme falls into the PPF.

“There are some aspects of it where pensioners could be worse off, for example they’re only going to get increases on anything that’s accrued post-1997,” he said. “In reality the extent to which pensioner members could be adversely affected by this is pretty marginal.”

He also cautioned that the government would still need to consider how to deal with equalisation of guaranteed minimum pensions in respect of transferred members when a method is established, adding that the government could not reasonably expect the receiving scheme to bear that risk.

Sarah Miller, an associate at Arc Pensions Law, argued that the scope could have been extended to cover other situations where schemes need to be transferred or merged, such as in preparation for buyout.

Citing a recent client for whom the firm was successful in setting up a new contracted-out scheme to transfer into within the appropriate time frame, she said protracted current procedures had threatened the project.

“We were obviously lucky, but even with that we had a whole load of hurdles to jump through,” she said.

However, she said growing pressure from schemes was leading to an improved service from HM Revenue & Customs’ scheme reconciliation service.

No time for wider issues

The concerns were largely ignored in the final regulations, with the government response citing “urgency” as its reason for not expanding its scope.

“It did strike me as odd because I’ve not known the DWP to move with anything like this kind of speed in the past,” said Ian Neale, director at policy specialists Aries Insight.

Neale said other urgent issues remain under consideration by the department, and have not found such speedy responses.

One such issue is the bulk transfer of members without consent to schemes that have never been contracted out.

Under the new regulations, written consent will still be required from members, in which they acknowledge that the benefits paid may be in a different form and amount from those they currently receive, before the transfer can be made.

However, with large schemes, the size of membership and possible gaps in record-keeping mean it can be impractical or even impossible to contact all members.

“There are, I think, a significant number [of schemes], it’s not just one or two employers wanting to do this,” said Neale. “The government knows this and has known this and acknowledged it for a year.”

In its response to the consultation the DWP confirmed it is continuing to consider solutions to this problem.