Government to outlaw pension 'bribes'

Steve WebbPA

Companies will try anything they can get away with in order to reduce their pension obligations. Many have realised that the pension promises they made in the past are threatening their future, so have come up with a variety of wheezes to get rid of some of the burden.

One increasingly popular one is the 'enhanced transfer' offer. It sounds pretty attractive, and in some cases companies offer to put in extra money for those who chose this option. So why is the government cracking down on the practice?

The transfer

The idea is that the companies can swap an ongoing commitment for a one-off payment. Instead of having to pay out the pension, or part of it, every month from the day you retire to the day you die, they can give you a lump sum. This takes some of the risk out of the pension for them - because if you live to a ripe old age they will be quids in.

Individuals are offered the cash equivalent of their pension so far, with an additional top-up to sweeten the deal. Some do not realise that this means taking on the risk of living longer. They sign up to what they think is a better deal, only to face the possibility of a nasty surprise when they come to buy an annuity with the cash.

Outlawing

The government has been worried about these 'enhanced transfers' for some time. And Steve Webb, the Pensions Minister (pictured), is expected to outlaw them. He says: "We are working with key industry groups to develop a code of practice that will be published by the summer to cover all types of enhanced transfer exercises. I hope that this will be endorsed across the pensions industry."

It sounds like a step forward, and that it could nip in the bud a trend that could spell long term trouble for Britain's workforce. However, there's just one small caveat.

The risk

The pensions industry and those running and funding the pension schemes in the UK's workplaces are not made of money. They are trying to cut their pension costs, because in many cases there's a very real danger that the risk they unwittingly took on when they established final salary pensions could end up bringing the company down.

If they are stopped from using this method to cut their risks, they will simply be faced with finding another one - which isn't likely to work in favour of the workforce either - or to shut up shop completely.

When you look at it from that perspective, it's not quite such a victory now is it?
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