I wrote here a few weeks ago that I suspected that all the changes to the pensions regime in the last few months were less about private pensions than about public pensions.
The changes make defined contribution (DC) pensions (the ones where you put your money in and hope for the best) look much more attractive than they once did relative to defined benefit (DB) schemes.
Until now, there has been absolutely no reason for most people (beyond those with tiny pensions) to move from DB to DC – the guarantee of an index-linked income for life was just too good. But the recent changes are making DC look pretty good.
We are to be able to withdraw cash from our DC pensions whenever we like and in whatever volumes we like. We are to be able to leave them to our heirs tax free if we die before we are 75, and subject only to our heir’s marginal rate of income tax after that. That’s something that could create multi-generational trust funds for well-off families.
Look at that list of flexible freedoms – the inheritability in particular – and a good many people with DB pensions might be beginning to think they quite fancy DC pensions. They might not be right on this – retirement isn’t a time to be taking risks (and DC is much riskier than DB); the transfer value of a DB pension rarely reflects its true value; and a guaranteed lifetime income is an amazing thing. Plus, DB pensions can come with death in service payments too.
But we all want to leave as much as we can to our children, and DB pensions come with increasing amounts of regulatory risk (the government keeps changing the rules) so it is no surprise to see Hymans Robertson predicting that some 30% of those in final salary schemes of FTSE 350 companies are likely to try to transfer out.
This will be great news for companies with final salary schemes – it will get some of their pensions liabilities off their hands much earlier than they expected. But it might also be good news for the taxpayer.
The idea at the moment is not to allow those on public sector DB schemes to transfer out. That’s because public sector pensions are rarely funded (they are paid from general tax revenues every year) so the state doesn’t have the cash to hand to pay out large lump sums for transfers even if doing so would be cheaper over the long term.
But the demand from public sector workers to have similar rights to private sector workers in terms of inheritability is likely to pick up as the years go by, something that will make it easier for the government to push new employees at least away from expensive DB schemes into cheaper DC schemes.
I asked pensions expert Ros Altman about this yesterday (you can follow our exchange on Twitter – I’m @MerrynSW and she is @rosaltmann) and she agreed that the idea could be “pretty popular” with new public employees (and perhaps with the unions even). Win, win really.