The Pensions Regulator has published – for consultation - its draft guidance for trustees on managing member requests for transfers from defined benefit to defined contribution arrangements.
The Regulator’s intervention arises from an expectation that from 6 April more members of DB schemes may wish to transfer to DC arrangements in order to take advantage of the new freedom for DC members to take pension savings as cash lump sums or via drawdown. The guidance is also designed to reflect the fact that the Pension Schemes Act 2015, when enacted, will provide that where a member’s cash equivalent transfer value is over £30,000, the member must take independent financial advice before transferring.
The aim of the guidance
TPR says that the guidance is intended to:
- help trustees ensure they have appropriate processes in place to manage transfer requests;
- prompt trustees to consider the impact of transfer values as part of an integrated approach to risk management of their scheme; and
- require trustees to provide clear information for members so that they can get independent advice on the best option for them.
Scope of the guidance
The proposed guidance emphasises that for most members, it is highly likely in current conditions to be in their best financial interests to remain in their DB arrangement. However, there will be exceptions to this.
Much of the guidance focuses on the transfer process and the need for trustees to ensure that members have received appropriate financial advice before they make a transfer. However, the guidance says that the trustees are not “responsible for checking what advice was given, what recommendation was made or to confirm whether the member is following that recommendation”.
The guidance also confirms that it “is not the trustee’s role to second-guess the member’s individual circumstances… Nor is it their role to prevent a member from making decisions which the trustees might consider to be inappropriate to the member’s circumstances”.
Trustees are reminded that the financial advice requirement is not a substitute for continuing to investigate the status of the proposed receiving scheme: “We expect trustees to conduct proper due diligence on the receiving scheme to ensure that it is a legitimate arrangement”.
The guidance emphasises that trustees’ powers and duties in relation to DB to DC transfers remain substantially as they were before the Budget announcements last year. However, trustees must monitor demand from members for transfers. In relation to funding, trustees might consider whether to commission a fresh actuarial assessment of their scheme in light of the number of transfers, and whether any reduction in transfer values is needed. The guidance does note that more members choosing to transfer closer to retirement could increase the scheme’s liquidity requirements and hence have an impact on its investment strategy.
The draft guidance should be treated with some caution, not least because the detail of the legislation which it describes has not been finalised. However, it does look like the guidance will provide a useful summary of the numerous hoops that trustees and members will need to jump through in respect of the new financial advice requirement on DB to DC transfers.
For its part, TPR says that the consultation, which closes on 17 March, is just the first part of a package of communications to help trustees prepare for 6 April. In particular, it will publish further guidance for occupational scheme trustees in early March, following publication of the relevant DWP regulations, on the new requirements for trustees to direct DC members approaching retirement to Pension Wise (the “guidance guarantee” service). All of this means that a busy time for trustees is likely to get even busier over the coming weeks!
TPR’s consultation and draft guidance can be found here.