In light of concerns about whether there are barriers preventing people from accessing the new DC flexibilities, in July 2015 the Treasury issued a consultation looking at early exit charges and how the transfer process could be made quicker and smoother. The Government response to the consultation was published last week setting out proposals for change. It is important for trustees of schemes providing DC benefits to be aware of these proposals as they will place additional requirements on them.
The consultation sought views on how the statutory process for transfers is currently operating for those with "flexible benefits" (essentially, DC benefits) and how it might be made smoother and more efficient.
The proposed changes
Evidence gathered alongside the consultation showed that the average transfer time for those transferring between FCA-regulated contract-based pension schemes was 16 days, compared to 39 days for trust-based pensions. The response document states that it is clear that there are considerable improvements to be made, especially for trust-based schemes, and that in general these improvements need to be made as part of the overall process of increasing the administrative efficiency of trust-based pension schemes. The following steps will therefore be taken.
The Pensions Regulator's best practice guidance to support its new DC code will cover the actions needed to ensure that core financial transactions, including transfers, are processed promptly and accurately, including considering 'digital by default' approaches, scheme documentation and improved administration processes. The draft of the new DC code was published for consultation in November 2015 and is expected to come into force in July. The Regulator has previously stated that the consultation on supporting guidance will be published in the Spring.
A new requirement will be introduced for trust-based schemes to report regularly on their performance in processing transfers, including against possible benchmarks and new transfer targets. The Regulator will work with the pensions industry to identify the best way of ensuring that this improves transparency and drives up standards for individuals, whilst being practicable for schemes to implement. It is intended that the new reporting measures will come into force in the Summer.
Whilst the Government has decided against the options of creating a separate transfer process for those with flexible benefits and reducing the statutory timeframe for pension transfers, which would perhaps have required more far-reaching changes by trustees to transfer processes, the proposed changes could still have a significant impact. The extent of that impact will depend on the detail of these measures and it will be interesting to see exactly what the new guidance sets out as best practice for transfers. It will also be interesting to see what level of detail of reporting will be required. For now, trustees should note the upcoming changes and may want to start to consider how smoothly their transfer processes are working.
Early exit charges
The proposed changes
The term "early exit charges" is used here to mean all costs and value reductions borne by individuals (who are eligible to access their pension savings flexibly) when seeking to access their pension early, which they would not face if they carried out the same transaction at their selected or expected retirement date.
In advance of publishing the response to consultation, on 19 January it was announced that the Government proposes to place a duty on the FCA to cap excessive early exit charges for those eligible to access the pension freedoms, and that in due course, the FCA will consult fully on setting the level of the cap. The response states that the FCA will be setting out its next steps shortly, with a view to implementing its duty before the end of March 2017.
The response also confirms that, while current evidence suggests that a smaller proportion of members of trust-based schemes might incur these charges, the Government is committed to ensuring that all pension scheme members are protected against excessive early exit charges. In parallel with the FCA process, the Government will therefore consider how existing powers to limit pension charges can be used to implement a comparable cap for trust-based schemes. The Pensions Regulator will work alongside the FCA to ensure that any relevant concerns in relation to trust-based schemes are appropriately addressed.
The overall impact of this change will depend on whether schemes currently apply such charges and the level at which the cap is set. As an initial step, trustees might want to check whether any early exit charges currently apply in their scheme.
Other points in the response
Another issue which the July 2015 consultation considered was the impact of the requirement for members to take independent advice before transferring “safeguarded benefits” (such as defined benefits) in excess of a particular value in order to access flexible benefits. However, as the Financial Advice Market Review launched by the Government and FCA in October could have an impact on the nature of and need for advice, the Government intends to wait for the outcome of this review before taking forward specific action on the advice requirement.
There was enthusiasm amongst many respondents for the creation of a 'whitelist' of approved pension providers. The response notes that a whitelist would require a rigorous quality assurance process and regular monitoring of trust-based schemes and reports that the Government is currently considering the underlying issue of whether there is a need for increased supervision of trust-based providers, particularly for master trusts. The Government will continue to develop its thinking in this area over the course of the year.
In response to issues raised in the consultation, Pension Wise will develop guidance on pension transfers in order to support individuals through the transfer process.