Transfers from Defined Benefit (DB) schemes are a bit of a hot topic just now. In this article we look at a couple of factors that could prevent a transfer from happening.
Equalisation of pensions
Prior to the Barber case in 1990, DB pension schemes typically provided pensions at age 60 for women and age 65 for men. After Barber, schemes had to change their rules so that benefits were paid at the same age for men and women. They could be equalised at the higher age or any age between the two ages but until a pension scheme got round to changing their rules, they were deemed to be equalised at the lower age.
The scheme rules will state the legal process by which the rules can be changed. So if the proper process isn’t followed, it could be that the scheme thinks it’s equalised at say age 65 when in fact it could be that the lower age applies.
Most providers therefore need confirmation that benefits in the scheme have been equalised before the transfer can go ahead, otherwise the transfer value may not reflect the correct value of the benefits.
Usually it’s a formality but sometimes the ceding scheme isn’t able to provide the necessary confirmation and the transfer can’t go ahead.
Guaranteed Minimum Pension (GMP)
DB schemes which were contracted-out before 1997 have to provide a GMP roughly equivalent to the earnings-related State pension the member would have received if they’d stayed in the State scheme.
This runs alongside the scheme pension and at age 60 for women or 65 for men, the higher of the two pensions has to be paid.
In a transfer, the cost of the GMP at the relevant age has to be covered by that part of the transfer value monies that can be used for this purpose. Often it’s not, because the cost doesn’t actually have to be met until age 60/65.
Post-1997 funds (when GMP stopped accruing) and Additional Voluntary Contributions (AVCs) can’t be used to cover the GMP cost.
If the GMP cost isn’t covered, the transfer can’t happen so a receiving scheme needs confirmation that the GMP cost at 60/65 is covered now by that part of the transfer value that can be used to cover it (also known as the reserved amount).
So, just because the total transfer value is higher than the GMP cost at age 60/65 doesn’t necessarily mean that the reserved amount is high enough.
If the cost isn’t covered the transfer can’t go ahead unless the ceding scheme is willing to increase the transfer value to the point that it is covered.