September 2015
Freedom and Choice – Transfers from LGPS to Defined Contribution Schemes
Your employees are members of the LGPS and therefore are members of a public sector Defined Benefit scheme. This means that the flexibilities being introduced under ‘Freedom and Choice’ do not impact on how they can take their benefits directly from the LGPS.
Background
The UK Government’s announcement in the 2014 Budget that reforms to workplace pensions would be made, effective from 6 April 2015. These reforms offer greater flexibility (‘Freedom and Choice’) in the way individuals aged 55 and over can access any Defined Contribution pension savings they may have.
From 6 April 2015 members of certain pension schemes will have more freedom over how they take their money from their pension pot.
These changes affect pension scheme members who are:
- age 55 or over, and
- have a pension based on how much has been paid into their pot (a Defined Contribution pension).
There will now be four main options for members who are in a Defined Contribution pension scheme which offers flexible benefits from their pension pot including:
- purchase an annuity (annual pension) or scheme pension if offered by the scheme
- flexi-access drawdown
- taking a number of cash sums at different stages
- taking the entire pot as cash in one go.
Impact on Scottish LGPS members
Your employees are members of the LGPS and therefore are members of a public sector Defined Benefit scheme. This means that the flexibilities being introduced under ‘Freedom and Choice’ do not impact on how they can take their benefits directly from the LGPS.
There are some indirect changes which will impact upon any members of the LGPS who are considering transferring the value of their accrued LGPS Defined Benefit pension rights from the LGPS to a Defined Contribution arrangement offering ‘flexible benefits’ and these are noted below:
- If an LGPS member ceases active membership of the scheme with 3 or more months’ membership then, unless they are retiring with immediate payment of their benefits on the grounds of redundancy, business efficiency or ill-health, they will be given information about their right to transfer their benefits built up in the LGPS. If they then choose to use the right to transfer the value of their LGPS Defined Benefits to a Defined Contribution pension scheme which offers flexible benefits, they will be able use the ‘Freedom and Choice’ flexibilities under that scheme.
- If a person ceases membership of the LGPS and wishes to use the right to transfer the value of their LGPS Defined Benefits to a Defined Contribution pension scheme which offers flexible benefits they will be obliged by law to obtain appropriate independent advice, at their own cost1, from an authorised independent adviser who is registered with the Financial Conduct Authority (FCA). The member must prove to the LGPS administering authority that this advice has been taken before any payment of a transfer can be made from the LGPS Pension Fund(s) to a Defined Contribution pension scheme offering flexible benefits.
- Members are only entitled to make one request for a transfer quotation from the LGPS administering authority in any 12 month period and, if they wish to proceed with a transfer, the election to proceed must be made at least 12 months before their Normal Pension Age in the LGPS or, if they are a Pension Credit member2, at least 12 months before their Normal Benefit Age.
In addition members can only transfer benefits from the LGPS if they have left the scheme and have not already drawn benefits from the LGPS (either in their current employment or any earlier employment).
- If a Scheme member is looking for general information about Freedom and Choice and how that relates to the LGPS in Scotland, please direct them to the Q&A site for LGPS Members (Scotland) which has been produced to provide Scheme members with information about the new rules governing transfers from the LGPS to Defined Contribution pension schemes offering flexible benefits.
- If a Scheme member has questions about the Defined Benefits they have accrued whilst a member of the LGPS, the administering authority will be in a position to provide them with information about their particular situation. However, your LGPS Pension Fund administering authority will, by law, not be able to provide advice to Scheme members, which can only be provided by an independent adviser who is authorised by the Financial Conduct Authority (FCA) to provide advice on transfers between pension schemes.
Implications for Employers
Since July 2012, a Scheme employer had not been allowed to take any action where the sole or main purpose is to induce a Scheme member to opt out of the Scheme under section 54 of the Pensions Act 2008.
A Scheme employer attempting to encourage, persuade or induce a member to opt out of the Scheme in order to transfer their benefits from the LGPS to a Defined Contribution scheme which offers flexible benefits would therefore be running the risk of contravening this provision.
In such a situation, the Scheme employer concerned could be issued with a compliance notice by the Pensions Regulator and ultimately could be subject to a fixed penalty notice of not more than £50,000.
For further information:
Jane 0’Donnell: jane.o’donnell@cosla.gov.uk
Dave Watson: d.watson@unison.co.uk