UK - Removing limited price indexation for defined contribution schemes could create a fresh wave of financial scandals, NAPF chairman Terry Faulkner warns.
Faulkner says the change – which retrospectively removes the requirement to provide LPI on protected rights balances in DC schemes – favours contract-based defined contribution schemes and will encourage a mass exodus of final salary scheme provision.
As indexation is no longer a requirement for DC schemes, Faulkner said that there were advantages in deferred DB members transferring into a money purchase plan. They they could then rearrange their benefits to get a larger pension from their tax-free lump sum.
Faulkner said it would also encourage pension unlocking companies to target scheme members.
He said: “This is another piece of non-joined-up government. By favouring DC over other types of build up, it is creating a possible arbitrage situation which the ‘early release schemes’ being investigated by the FSA can exploit.
“Will this create yet another wave of financial scandals, with deferred members being persuaded to transfer out of DB schemes to achieve a benefit that government will not allow trustees of such schemes to provide directly to their members?”
Mercer Human Resource Consulting European principle Deborah Cooper agreed and described the amendment as “bizarre”.
She added: “This is another obstacle for new DB provision and it is making it harder for employers to do what the government wants them to do.”
And Watson Wyatt partner Colin Singer said: “It would be preferable if the requirement was removed altogether in the same way as is proposed for DC schemes.”
Faulkner also called on the government to amend the Pensions Bill and give trustees the ability to offer a choice between a higher initial flat rate pension and a smaller initial indexed pension, without members having to pay a commission for the privilege.
“Indexed annuities are not popular. It is right that retirees should have a choice. Members with small pensions are also in DB schemes. Government please take note,” he said.
The Centre for Social Justice is calling for the state pension age to be raised to 70 by 2028 and to 75 by 2035, a much faster rise than currently planned.
The High Court has blocked the £12bn transfer of Prudential's annuity book to Rothesay Life, citing the insurer's lack of "established reputation" and differing "capital management policies".
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