A new code of conduct introduced by the Department for Work and Pensions (DWP) will stop employers offering members of Final Salary pensions cash incentives to leave the scheme.
Transfers from Final Salary pensions
Over the past few years an increasing numbers of employers have been offering members of Final Salary pensions, also known as Defined Benefit pensions, financial incentives to leave the scheme, thereby reducing an employer’s long term liabilities.
However, many retirement experts have been concerned for some time that members are transferring away from Final Salary schemes, losing out on valuable index linked and guaranteed pensions, simply to get an immediate cash lump sum.
The concern is that members are prioritising an immediate cash payment over their long term retirement planning.
FSA guidelines on Final Salary transfers
Some 20,000 people are believed to have already taken up a cash incentive to move their pension, despite the FSA (Financial Services Authority) saying that in the vast majority of cases it was not in a member’s interest to transfer out.
The number of people being offered cash incentives is thought to be significantly higher at around 90,000, with KPMG saying that the number of people offered such incentives could rise massively to over two million in years to come.
However, it now seems that the new Code of Conduct, which has been developed by the DWP in association with insurers, regulators and actuaries, will put a stop to the practice.
Although the new code will be voluntary, Pensions Minister, Steve Webb said he expected the guidelines to be “adopted as standard for all future transfer exercises, without exception”. Pension experts predict that if the code is not followed legislation could follow to force employers to adhere to the new rules.
Advice in Final Salary pension transfers
In addition to banning cash incentives the new code will force employees to take financial advice before making a decision to transfer benefits from a Final Salary or Defined Benefit pension. Other provisions will include a standardisation of how transfer values are calculated in addition to forcing employers to maintain better records.
Webb also said: “While it is understandable that firms need to manage their pension liabilities, this must be done in a way that enables scheme members to make informed choices about their pensions. The practice of offering cash incentives for people to give up valuable salary-related pension rights was a source of particular concern. I, therefore, welcome the work that has been done to come up with an industry code to stamp out bad practice.”
Alan Howard, of the Institute and Faculty of Actuaries, who helped to develop the new code said: “These ‘enhanced transfer values’ are a relatively new phenomenon and therefore regulations and guidance have, until now, been lacking and this concerned our members.”
He continued: “Providing people with the right information, in a language that they understand and with the support they need to make an informed decision, is vital. Adoption of the code will mean that individuals will have this and should be able to make a decision that is right for their particular circumstances.”
Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement strategies for clients the length and breadth of the UK. If you have been offered an incentive to leave a Final Salary scheme and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org