MONEY COMMENT
Company Pension Transfers Are Frozen

By Cliff D'Arcy
March 5, 2003

Recently, we wrote about your options on leaving a company pension scheme. Essentially, with a guaranteed final-salary plan, you have two options:

1. Leave your pension where it is and become a "preserved pensioner" - not to be confused with Joan Collins or Cher!

You'll receive your pension income at the normal retirement date for your scheme, based on your salary and service when you left. You may also be entitled to other benefits, such as a lump sum or a spouse's pension when you die.

2. You can ask your ex-employer to transfer the value of your benefits into another company scheme or a personal pension.

Company pensions are administered by a board of trustees, a group of pension guardians responsible for managing schemes on behalf of employees and pensioners. These are the people in charge of providing valuations and transfer payments when you switch schemes.

However, the company pensions regulator, the Occupational Pensions Regulatory Authority (OPRA), has just introduced a ruling that could make impossible for you to switch in the immediate future.

OPRA has told company pension trustees that they can temporarily refuse to value preserved benefits. This is to prevent leavers from taking too large a slice of the fund with them, thus diminishing the remaining pot for pensions in payment, preserved benefits and existing members.

Without this valuation, it is impossible for you to transfer your benefits to another scheme. Your pension will be held captive until the Department for Work and Pensions produces new guidelines setting out how future transfers should be calculated.

So, why has OPRA given the trustees the option to prevent us from transferring out? Well, worried pension trustees have been lobbying OPRA to express their concerns that the current formula for calculating transfer values favours leavers over existing members. This is draining vital funds from their over-stretched schemes and worsening the financial troubles they already face, such as:

• The stock market has almost halved since 1999, severely depleting the wealth of the pension funds
• The removal of dividend tax credits in 1997 has reduced the annual income of pension funds by an estimated £5bn
• Longer life spans mean pensioners are receiving their pensions for longer
• Over the last twenty years, over-optimistic expectations of future stock-market returns led many firms to suspend pension contributions.

Indeed, a recent estimate put the total shortfall in the pension funds of Britain's 100 largest companies at a stunning £100bn!

So, this temporary relaxation of the rule requiring trustees to provide transfer values to ex-members may halt the migration of some money from company pension schemes. Undoubtedly, transfers will resume once the new legislation is in place, although the revised formula is likely to lead to lower transfer values in future.

In the meantime, if you're worried about your retirement plans (and almost all of us should be), read our popular guide, 'What Everybody Must Know About Pensions', in our pension centre. And there's more about escalating company pension shortfalls here.