The government is to ban employees from transferring out of public sector defined benefit (DB) pension schemes under proposals announced by Chancellor George Osborne in the Budget 2014.
This coincides with the government’s announcement of a radical overhaul of defined contribution (DC) pensions in the UK, which will enable anyone aged 55 or over, from April 2015, to take their entire DC pension fund as cash should they wish.
The Budget documents stated: “The government recognises that greater flexibility could lead to more people seeking to transfer from defined benefit to defined contribution schemes.
”For public service defined benefit schemes, this could represent a significant cost to the taxpayer, as these schemes are largely unfunded.
“Having considered this carefully, the government intends to introduce legislation to remove the option to transfer for those in public sector schemes, except in very limited circumstances.
“While the government would, in principle, welcome the opportunity to extend greater choice to members of private sector defined benefit pension schemes, it will not do so at the expense of significant damage to the wider economy. Funded defined benefit schemes play an important role in funding long-term investment in the UK economy, which the government does not want to put at risk.
“The government’s starting point is therefore that, while in principle it would like to permit transfers from private sector DB schemes under the new freedoms, it will only consider doing so if the risks and issues around doing so can be shown to be manageable.”
Laith Khalaf, head of corporate research at Hargreaves Lansdown, said: “The ability to take your pension as and when you want it will be hugely popular with pension savers but it could cripple the public finances if the public sector all took this route.
“[Public sector employees] still have very attractive pension schemes but this is a necessary measure to protect the taxpayer from bankruptcy.”
Initial government estimates suggest that the net cost of 1% of public service workers transferring out of public service schemes each year would be £200 million.
Further pension reforms and details announced in the Budget 2014 are set out in the government’s consultation, Freedom and choice in pensions.