Final salary pension transfers stall as High Court thorws rules into doubt
People who attempt to swap final salary company pensions for cash are being left in limbo following a controversial legal judgment.
More than a quarter of a million savers have taken advantage of highly generous cash offers to give up membership of these workplace pension schemes in recent years.
A pension that promises to pay £30,000 a year might be swapped for £900,000 or more in cash, for instance. Savers are also attracted by the extra flexibility and tax treatment on death of personal pensions. It is thought that £34.2bn was withdrawn from company schemes in 2017 alone.
But future transfers are now under threat in the aftermath of a High Court ruling that will force Lloyds Banking Group to equalise benefits between male and female staff. According to Royal London, the mutual pension firm, some schemes have put a temporary block on transfers following the court case.
Three female members of the high street bank’s scheme argued that their pensions had been undervalued as a result of “guaranteed minimum pensions” (GMPs) that applied when staff were taken out of the earnings-related state pension between 1990 and 1997.
For decades schemes argued that they did not have to correct the inequalities created by the GMP rules. Losing the case means Lloyds is expected to have to spend up to £150m resolving the GMP issue.
The bill for other British firms with final salary liabilities could be as high as £15bn in total, according to estimates by consultancy LCP.
Royal London’s Sir Steve Webb warned that the ruling’s lack of clarity was making schemes hesitant to approve transfers.
He said: “It is vital that pension savers who are considering a transfer out are not left in limbo while the industry works out what exactly this ruling means.
“The pensions industry and pension savers urgently need to hear from the authorities what they should do now with regard to pension scheme valuations and pension transfers.
“With some pension transfers already on hold, a public statement is urgently needed.”
Government rules force savers to take financial advice when they transfer a final salary pension valued at £30,000 or more. Strictly speaking, the adviser does not need to recommend a move for a transfer to go ahead. However, in practice savers have been left frustrated by pension firms that will not accept a transfer unless it is signed off by an adviser.
The Financial Ombudsman Service said this week that it had received more than 300 complaints relating to final salary transfers since 2015. Despite this representing just 2pc of all complaints, the ombudsman said these transfers were a “major concern”.
Most disputes were about delays in receiving financial advice. Of these complaints, 44pc were upheld. Around 30 complaints were made against an adviser who would not recommend a transfer. There has been a boom in transfers since 2015, when reforms known as the “pension freedoms” made “defined contribution” and personal pensions much more attractive.
Final salary schemes pay a guaranteed, inflation-linked income for life but were not included in the reforms. As a result, payments typically stop when the member or their spouse dies.