At the heart of the radical changes to the DC pensions landscape announced in the Budget last year, (see our article on this in the June edition of Pensions Pieces) was the forthcoming opportunity for members of defined contribution schemes aged 55 or over to be able to access all of their pension savings from April this year without the punitive tax rates that currently apply if they do so. However, these flexibilities will only apply to those in DC arrangements, giving rise to fear that there may be a run on defined benefit pension schemes with their members seeking, en masse, to transfer to DC arrangements to take advantage of the new flexibilities. The Government said that it would reflect on the position of defined benefit pension schemes and in its response to the consultation on the budget changes confirmed that it would continue to allow members of private sector DB schemes to transfer their benefits, but subject to certain conditions. The detail in this regard is now set out in the Pension Schemes Act 2015 ('the 2015 Act') (which received Royal Assent on 3 March 2015).
The 2015 Act states, amongst other things, that where a member (or a person entitled to survivor benefits) has rights to benefits other than money purchase or cash balance benefits (essentially final salary benefits or benefits with an element of a guarantee) then the trustees or managers of the pension scheme must check that the member (or survivor) has received 'appropriate independent advice' before:
- Converting any of those benefits into different benefits that are flexible benefits under the scheme;
- Making a transfer payment in respect of any of those benefits 'with a view to acquiring' a right or entitlement to flexible benefits for a member or a survivor in another pension scheme;
- Paying a lump sum that would be an uncrystallised funds pension lump sum in respect of any of these benefits.
'Flexible benefits' are defined as being money purchase benefits (as defined in the Pension Schemes Act 1993 although noting that this definition has been recently amended, see our articles), cash balance benefits and benefits other than money purchase or cash balance benefits calculated by reference to the amount available for the provision of benefits with respect to the member. It is important to note that these provisions apply to any kind of transfer of this kind (i.e. not just where a member is exercising a statutory right to take a transfer, but also any transfer rights under the pension scheme rules). There has been much comment on how trustees should determine whether or not the transaction would be 'with a view to acquiring a right or entitlement to flexible benefits'. On this, regulations1 say that part of the information which trustees must provide to members includes that, in the absence of any member confirmation otherwise, the trustees will assume that the purpose of the transfer is to provide flexible benefits in the receiving scheme. However, the legislation does not say that making this assumption in this way will be sufficient to establish the point, so should the trustees also be asking more specific questions of the member in this regard (and to what extent can they rely on responses received)?
A further question is what does 'appropriate independent advice' mean? The 2015 Act says that this must be advice given by an 'authorised independent adviser', being an adviser who is authorised to give advice under the Financial Services and Markets Act 2000 ('FSMA') - i.e. this is regulated financial advice.
The regulations give more detail on this and indeed more generally on the question of advice. They say that:
- The 'authorised independent adviser' must be authorised specifically to be able to give advice on the conversion or transfer of pension benefits and the advice must be specific be specific to the type of relevant transaction proposed;
- Confirmation from the member or survivor that appropriate independent advice has been received must be in the form of a statement in writing from the authorised independent adviser who is providing the advice confirming a number of matters, including that the advice is specific to the type of transaction proposed, and that the adviser has the relevant authority under FSMA to advise on the transfer/conversion of benefits;
- The member effectively has three months from the date they are provided with a statement of entitlement/valuation in relation to their benefits or from when the trustees agree in principle to carry out the relevant transaction to give the trustees the confirmation (in the prescribed form) that they have received the appropriate independent advice.
Further, the regulations provide that the financial advice requirement will not apply where a member's safeguarded benefits are £30,000 or less and also include requirements on trustees to provide information to members at certain times – e.g. where a member makes a written request to the trustees or managers as to how to carry out a relevant transaction. It is disappointing that these regulations have been introduced with so little time before the new pension flexibilities come into operation, giving trustees very short notice to put provisions in place to be able to comply with them.
The legislation also provides that a failure to carry out the checks will not affect the validity of the transfer (although trustees can be fined for the breach). However, what if trustees fail to carry out a check and make a transfer which ultimately leads to unfavourable results for the member? It may be that the member may be able to hold the trustees responsible for much wider implications where they have failed to check that the member has taken advice. Even though there are further provisions in the 2015 Act which say trustees do not have to carry out a statutory transfer where they have been unable to carry out the check for reasons beyond their control or have done the check and it reveals that the member has not taken appropriate financial advice, that will not deal with the situation where no attempts have been made to carry out the checks at all – all the more reason why trustees will want to ensure that appropriate procedures are in place to deal with this requirement where prescribed by the legislation.
There is also no provision for relief for trustees where their check reveals that the member has taken appropriate independent advice and the member is acting contrary to it in asking to transfer. There is nothing to say that a member has to act in accordance with the advice received. Although some might say this is no different to the ordinary transfer scenario, with the extra responsibility on trustees to check that the advice has been obtained they may feel uncomfortable proceeding with a transfer if they know that the member is acting against advice received. Perhaps the most powerful consequence is that members do not have a statutory right to a transfer without the advice being received. This does protect trustees in this content from being forced to make a transfer until advice has been taken.
Employers and advice
The 2015 Act and regulations also sets out provisions which have not been widely publicised which could impact on employers. These are that employers must, subject to certain exceptions, arrange for or pay for a member or survivor to receive the appropriate independent advice referred to above, in certain circumstances. Those circumstances are where a written communication has been sent by or on behalf of employers to at least two members or survivors which sets out options available to those members/survivors in terms that 'encourage, persuade or induce the member or survivor' to request that the trustees or managers carry out the transaction. This would seem to be aimed at 'bulk' pension transfer incentive exercises, but there might be other cases where this could arguably apply because it is not completely clear what is meant by 'encourage, persuade or induce' - e.g. (perhaps at an extreme) is putting the member's transfer figures in bold typeface and in a separate box in a communication overly drawing attention to it to the extent that it might induce a member to transfer? An employer failing to comply with these requirements faces civil penalties of up to £50,000, so it is hoped that there will be some further clarity on this issue and/or that the Pensions Regulator (who will be responsible for enforcement) will take a pragmatic approach to this. There are also provisions for limits to be imposed on what employers will be required to pay, and prohibitions on an employer trying to recover the costs of compliance from members or survivors (with civil penalties for breaches).
What next ?
So the scene is set for how DB transfers aimed at taking advantage of DC flexibilities in other arrangements may operate and the Pensions Regulator has also confirmed that it is updating its guidance on transfers in the light of the newwith and a draft having been issued for consultation. In the meantime, trustees should alert their scheme administrators to this issue, and monitor developments in this regard to try to ensure that their scheme's administration and communications are updated to reflect the new requirements and so that the checks are carried out when necessary.