Following the introduction of the new DC flexibilities under the Pension Schemes Act 2015 (the “PSA 2015”) the Pensions Regulator recently issued guidance on the topic of “DB to DC transfers and conversions”. The key points to take from the Regulatory Guidance are summarised in the remainder of this article.
New Benefit Categories and Transfer Rights
Under the PSA 2015 a number of new definitions of benefit categories were introduced alongside a series of new statutory rights for members in relation to the transfer of these benefits.
The new definitions introduced by the PSA 2015 are as follows:
- Flexible benefits – these relate to money purchase benefits, cash balance benefits or other benefits determined by reference to the amount available to provide the benefit.
- Safeguarded benefits – these are benefits that are not flexible benefits and typically relate to DB benefits.
On and from 6 April 2015 the statutory transfer right applies at a benefit category level as opposed to a total scheme level as was previously the case. These categories being sub-divided into money purchase benefits, flexible benefits that are not money purchase benefits and benefits that are not flexible benefits, for example DB benefits.
No changes have been made in relation to the rules for statutory transfers of benefits that are not flexible benefits. For these benefits to be transferable under statute, accrual must have ceased and the application to transfer must be made one year or more before the scheme’s normal pension age.
The new statutory rights to transfer flexible benefits apply at any age before the benefits have crystallised and if a member has more than one category of benefits in the same scheme, they have separate transfer rights for each category. As a result it will not be possible for scheme rules to require a member to transfer all benefits at once and any such provision will be overridden.
The Independent Advice Requirement
Any transfer of safeguarded rights to acquire flexible benefits is subject to the requirement that the member must obtain appropriate independent advice. This requirement is applicable both in the case of statutory transfers and non-statutory transfers made under the scheme rules.
However, where the value of the safeguarded rights (before any reduction) is £30,000 the requirement to obtain independent legal advice is not applicable.
The independent advice requirement also applies to conversions or internal transfers of safeguarded benefits to flexible benefits within a scheme. Such internal transfers and conversions are not covered by any statutory transfer rights.
It is up to the trustees to check that a member has received appropriate independent advice from an authorised independent adviser before a transfer can proceed. Trustees are not however required to check the advice given or determine whether that advice has been followed.
The independent adviser must provide written confirmation of the following to the member:
- That the advice provided is specific to the type of transaction proposed by the member;
- That the adviser has the required authorisation under legislation to provide advice on safeguarded benefits;
- The reference number of the adviser’s company; and
- The name of the member who was given the advice and the scheme holding the safeguarded benefits to which the advice relates.
Trustees should retain a copy of the adviser’s written confirmation for their records and after receiving the written confirmation should check that the adviser has the necessary authorisation to provide the advice by referring to the Financial Services Register as maintained by the Financial Conduct Authority (the “FCA”). If the adviser is not on the register the member should be contacted as soon as possible and advised that the transfer will not proceed.
Paying for the Advice
It is the member’s responsibility to meet the costs of obtaining the independent advice. The exception is where the transfer is initiated by the employer. Employers have a responsibility to pay for such advice when either they, or the trustees, have written to two or more members and set out the option to transfer in a way that might encourage, persuade or induce a request to transfer.
Routine communications relating to member options (including the possibility of transferring or converting benefits) should not trigger the requirement for the employer to pay for the advice. However, trustees should err on the side of caution and avoid placing emphasis on a particular option. Trustees should also be alert to the employer’s potential motivation where a request is made for the trustees to supply information to members. If the trustees are in any doubt they should take legal advice to confirm that any communication is not deemed to encourage members to transfer.
Transfer Value Assumptions
There have been no changes to the legislation and guidance for setting statutory transfer values. However, the trustees are now required to consider the basis to apply for non-statutory transfers, and whether non-statutory transfers will be permitted by the trustees.
Equally there have been no changes to the legislative background covering the circumstances where transfer values might be reduced to reflect underfunding. However, again trustees should monitor transfer value requests and be alert to whether such requests are likely to pose additional risks to the scheme’s funding position, investment strategy or cash flow requirements.
Members may be unaware of whether they have safeguarded or flexible benefits (or indeed both) and the associated requirements to take advice when transferring safeguarded benefits. Any pre-retirement materials should therefore be reviewed and updated in light of the legislative changes. Information on the new pension flexibilities and the member’s obligations associated with the transfer of safeguarded benefits should be included.
Members should also be made aware of the time limits on transfer applications so that they do not inadvertently lose their right to a statutory transfer.