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Guaranteed annuity rates could be excluded from definition of 'safeguarded' pensions


The extent of a pension scheme member's 'safeguarded' pension benefits could be based solely on the value of their pension pot and not on the value of any guaranteed annuity rates (GARs) under plans for a "simpler" valuation method proposed by the Department of Work and Pensions (DWP).

The DWP said that it was putting forward the proposal in response to claims from personal pension providers that including the income promise element of GARs in the calculation "places a potentially significant practical and financial burden on them". However, it only plans to proceed with the change if doing so would "outweigh the reduced level of protection which would apply" in relevant cases".

Pension savers with 'safeguarded' benefits are required to take independent financial advice before transferring their savings into a defined contribution (DC) arrangement. This requirement, which was introduced along with new rules giving DC scheme members of retirement age more flexibility over how they access their savings, only applies where the safeguarded benefits are worth over £30,000. Safeguarded benefits generally refer to traditional salary-related defined benefit (DB) schemes and other benefits backed by guarantee.

The method that pension scheme trustees and providers must use to value a scheme member's safeguarded benefits for the purposes of the threshold is set out in legislation and is based on the cash equivalent of salary-related benefits under the scheme, according to a government consultation on its proposals. However, there is no agreed approach to valuing GAR benefits in a way which takes account of the value of the guarantee as well as the value of the member's pension pot, in part because of the sheer variety of GAR options available, it said.

"This issue particularly affects members with GAR benefits who currently have less than £30,000 in their pension pot, but whose benefits have a potential value of more than £30,000 when the 'promise' value of the GAR is taken into account," the government said. "Moreover, members may not understand why the value that is transferred (should the transfer proceed) will be less than the value used to determine whether advice is required."

The government said that pension scheme members should still be made "fully aware" of the value of the benefits that they may be surrendering if any changes are made to the valuation process, particularly if they would not otherwise be brought into the legal requirement to take independent advice. It is seeking views on whether it should legislate to introduce GAR-specific risk warnings to address this issue, or whether such risk warnings should instead "be part of a voluntary approach led by regulators and trade bodies working together".

Pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that the proposed change "would make life a lot easier for providers and advisers from an admin perspective", as well as mirroring the way that GARs are valued for the purposes of scheme's annual statements.

"However, some might see this as an easy route to offload GAR obligations, so caution will be needed: plenty of pots containing less than £30,000 have valuable GARs, which the consumer would lose by transferring the pot itself in order to access those savings flexibly," he said.

The 'call for evidence' on GAR valuation is included in a consultation dealing with various issues that have arisen since the April 2015 changes, which closes on 11 January 2016. These include the introduction of a new requirement for trustees of trust-based occupational pension schemes to provide generic risk warnings to members who wish to access their benefits flexibly, bringing them into line with requirements already imposed on contract-based schemes by the Financial Conduct Authority (FCA).

The government has also proposed changing the rules around pension sharing on divorce, including requiring schemes to write out to the former spouse of a scheme member who has applied to take their flexible benefits where an attachment order exists. It has also proposed some amendments to the entry rules for the Pension Protection Fund (PPF), designed to facilitate entry to the scheme if a sponsoring employer, who is no longer able to pay the pensions that it has promised, cannot be declared insolvent in the UK.

"One example of this stems from the Olympic Airlines case, which reached the Supreme Court earlier this year," said pensions expert Helen Hanbidge of Pinsent Masons. "After the airline collapsed, its UK operations were so limited that a winding-up petition could not be granted in the UK, meaning that the UK pension scheme did not qualify for PPF support."

"The government issued regulations to help the Olympic scheme, but these were extremely limited in scope. The DWP consultation proposes help for schemes with sponsoring employers in other EU member states that may be unable to commence insolvency proceedings in the UK amongst a number of changes to make it simpler for schemes that cannot have a UK insolvency event to apply to the PPF Board for entry," she said.

The proposed change in relation to attachment orders was anticipated by the FCA in October, but by limiting it to only flexible benefits the government's version was slightly narrower in scope than that envisaged by the regulator, she said.

"The idea is to give an ex-spouse the opportunity to go to court if the scheme member is proposing to take benefits from the scheme in a way which wasn't envisaged at the time of the divorce settlement and which may result in the ex-spouse losing out - for example, because the member wants to take all of their pension benefits rather than just a proportion of them as cash, so the ex-spouse would not become entitled to regular, ongoing pension payments from the scheme," she said.

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