UK - Removing limited price indexation for defined contribution schemes could have unintended consequences that will threaten occupational schemes, NAPF chairman Terry Faulkner warns.
Experts have warned that while the government’s proposals were good news for DC schemes, they could spell the end for final salary provision.
The National Association of Pension Funds’ chairman agreed that the measures could reduce final salary scheme provision and encourage greater take-up of personal pensions and contract-based defined contribution funds.
But he also believes the plans will encourage members to switch out of trust-based DC funds just before retirement for the sole purpose of securing a larger pension pot.
Faulkner explained: “This could have unintended consequences, and I am not sure the department for work and pensions has thought it out.
“People will be switching into a personal pension scheme just before retirement, purely so they get higher pensions and no indexation.
“Indexation should become discretionary or else it should be removed for all schemes.”
LPI – which currently forces members to buy an annuity that rises in line with inflation up to 5% – applies to pensions in payment from certain occupational schemes that are tax-approved.
Faulkner claimed that the “odd” plan also contradicted the government’s simplification regime by creating an unlevel playing field.
“Trust-based scheme members should be recognised by government as being just as important as contract-based employees and allow trustees to consider offering an option for a higher initial pension as they appear to be offering insurance companies.”
But the DWP hit back at the criticism: “If someone believes that the best way to provide for their retirement is by transferring their pension fund to a personal pension shortly before retirement, then it is entirely a matter for them. In any case, the situation already exists as currently only the contracted-out rights in a personal pension must be used to provide an index linked pension.”
The spokesman added that the proposal “would not have an impact” on DB schemes and would “not improve the relative attractiveness of DC provision over DB.”
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