By David Piltz
More haste, less speed
Defined-contribution (DC) pension schemes calculate transfer values at the date of disinvestment. There is good reason for this. A member in a DC pension scheme has a pot, made up of any contributions paid into it by or on behalf of the member and the investment income made over the years by the pot. The investments in that pot vary in value depending on how well the underlying investments are doing. In periods of low volatility, the day-to-day differences in value can be small, but the opposite can be true. You therefore do not know precisely what you are going to get from disinvesting a member’s DC pot until you actually disinvest it.
There is a rather large drafting error in the current Pension Schemes Bill (‘the Bill’). The Bill requires the transfer value of a money purchase benefit to be calculated on the day of receipt of the member’s application to transfer. Administrators of DC pension schemes will tell you that disinvesting a member’s pot on the date the request is actually received is in the real world usually impossible. Even if administrators were sitting there twiddling their thumbs and waiting for the receipt of requests (dream on), you cannot get investments disinvested that quickly. There is inevitably a delay between receiving the member’s application and investment managers disinvesting the assets held in the pot. In that time, which could be as short as a couple of days or as long as a few weeks, the value of the pot will inevitably have gone up or down. In the past, this has not mattered because the member gets the value of the pot on the day of disinvestment.
However, if the defect in the Bill is not rectified, there will now be a surplus or shortfall on almost every transfer from a DC pension scheme. If the value has gone down, then trustees will have to make good the loss. But of course they cannot take this from other members’ pots, so where is the government suggesting this money should come from, especially if the employer is not solvent? Less of a problem for trustees is where the value of a pot has risen. Here, if (as the law requires) trustees pay out the value at the earlier date, they are left with a surplus. This is unfair to the member transferring. The surplus cannot go into other members’ pots, but it could be used to pay any administration costs of the scheme.
With an election looming, the government is understandably in a hurry to push through legislation. However, it’s more important to get the legislation right than rush it along.
There is also another knock-on effect of this error. The new definition of money purchase (another name for DC) says to be money purchase there must not be a possibility for a surplus or deficit to arise. Followed to its logical (or should I say illogical) conclusion, the drafting error now abolishes occupational DC pensions altogether as members have a right to transfer, and because transfer values have to be calculated on the day of receipt of the member’s application, there is more than a possibility that a surplus or deficit will arise.
This year is going to be dominated by pension changes due to go live in April; it would be better to let the timescale on this slip than rush the changes through making mistakes that later have to be rectified, with collateral damage along the way, in this case for DC schemes and their trustees.
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