The government has issued a consultation seeking views on potential barriers to people accessing the DC flexibilities introduced in April 2015. Potential barriers may include unjustifiable early exit charges, slow transfers and the circumstances in which financial advice is needed.
Early exit charges
The consultation asks whether penalties levied on a member’s pension fund on an early transfer out have prevented members from using the DC flexibilities. The consultation acknowledges that such deductions may appear as administrative fees, exit penalties, indemnity commissions or disinvestment charges.
Where charges are levied, it seeks further detail on whether the basis of charging is fair and reasonable, and to try to discover why some charges are significantly higher than others. If it is found that such charges are a barrier to the new flexibilities, the government has identified three possible actions (if it decides to act at all):
- a cap on all early exit fees;
- a flexible cap that would apply in certain circumstances e.g. above a minimum fund size threshold or applicable to elements of a charge that can’t be justified as being fair; or
- a voluntary approach to allow charges to be applied in certain circumstances e.g. waiving or reducing a charge where the transfer is in order to access the new freedoms or where it is within the same company or scheme.
The consultation seeks feedback on what changes could be made to the legislative framework to make the transfer procedure smoother and more efficient, given that many DB scheme members may be looking to transfer to take advantage of the new DC flexibilities.
It asks for experience of schemes refusing to accept a transfer value or imposing conditions on members, and acknowledges that similar principles apply to contract-based schemes in which consumers should not face unreasonable barriers to change product, switch provider, submit a claim or make a complaint.
Feedback is sought on whether a new standard process should be limited to transfers made specifically to access the DC flexibilities, rather than applying to all transfers, and whether changes could be voluntary or whether legislative change is required.
Members with DB “safeguarded” benefits over £30,000 are required to take independent financial advice if they wish to transfer to a DC scheme. This requirement was introduced in order to protect members with safeguarded benefits. Safeguarded benefits are those benefits with an element of guarantee and therefore include DB benefits. Trustees of DB schemes are now required to check that individuals with benefits in excess of £30,000 have obtained independent financial advice before approving the transfer to a DC scheme.
The consultation asks for responses on how the advice requirement is operating in practice and whether there are any possible amendments to make the process quicker and smoother. It acknowledges that there have been instances where DB members with benefits below £30,000, and DC members who have opted for a drawdown product, have been required to obtain advice when it was not necessary.
The consultation runs until 21 October 2015, with a response expected later in the autumn.