Pensions minister urges crackdown on pension transfer incentives
by admin on May.24, 2011, under finance
Steve Webb, pensions minister, will be meeting with the Pensions Regulator and industry representatives to make his feelings known about the practice of pension transfer incentives. Mr. Webb is said to be concerned about the service, which finds employees are offered large cash sums to transfer from their final salary pension schemes to defined contribution plans, and could look into banning the practice.
The Pensions Regulator has warned in the past that what amounts to tricking members into giving up inflation proofing and other valuable pension rights is a dangerous game. In 2007, 2008 and 2009 they issued guidance to trustees of pension schemes, making it clear that Transfer Incentive Schemes were not something they would advocate.
The main problem is that companies are trying to get rid of some of the running costs of expensive pension schemes and employees are the ones paying with their futures. In many cases, they don’t understand what they are undertaking, and may not comprehend fully the implications of what could initially seem to be a good deal, Mr. Webb pointed out to the BBC that ‘if people are giving up good pension rights, at a price that isn’t ultimately fair to them that is not acceptable.’
Unfortunately, there is little that the government can actually do if employers decide they would like their workers to swap pension schemes. The practice is not illegal and trustees are helpless to oppose if offers made are outside the regulations of a scheme.
Incentives can be disguised in different packages, from straight cash payments to moving deferred pensions somewhere else, or employees could be persuaded to give up their inflation proofing in favour of cash offers or enhanced pensions. Mr. Webb commented that these changes can look like a better deal when proposed as a cash lump sum, but ‘people forget they will be retired for 20 or 30 years – compound interest means their pension could fall by a quarter or more if they give up inflation protection.’ He makes clear his worry about people being offered ‘superficially attractive deals’ against what may be best for their situation, and spoke of the urgent need to ‘root bad practice out of the market’, to stop people making the wrong decisions. The Pensions Regulator has agreed that there aren’t many workers who are totally clear on what their choices entail, saying that, without help, people are struggling to understand their options.
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