The Pension Schemes Act 2015 ("PSA 2015") introduces greater flexibility and guidance for pension scheme members. It will implement a range of changes to existing legislation as part of the government's initiative to reform workplace pensions.
Many of these changes tie in with the additional "Freedom of Choice" flexibilities introduced under the Taxation of Pensions Act 2014 (see our separate briefing note, available here). As widely reported in the Press these flexibilities provide retirees in defined contribution pension schemes with freedom to access their pensions as they wish; as cash sums, by flexible or capped drawdown, by transfers or by purchasing annuities.
The PSA 2015 has made a number of changes to members’ statutory rights to transfer their benefits in relation to their “flexible benefits” and “safeguarded benefits”. All members will have a statutory right to a partial transfer, irrespective of scheme specific rules. Members within defined benefit schemes (DB Schemes) will be able to transfer to defined contribution schemes (DC Schemes) and enjoy the new flexibilities of pension options. Similarly, DC Scheme members may wish to transfer to access the flexibilities their scheme denies.
If a member takes a statutory partial transfer, they must take a transfer of all their rights in one of three new categories of benefit:
- money purchase benefits
- flexible benefits other than money purchase benefits
- benefits that are not flexible benefits (such as final salary and career average benefits)
Members with different categories of benefits in the same scheme will have rights to transfer benefits in a single category, while leaving benefits in a different category within the original scheme.
Members with money purchase or flexible benefits will have an extended right to transfer out, beyond their normal pension age, up to the time their benefits are first drawn. As at present, members will have a statutory right to transfer benefits that are not flexible benefits only up to one year before normal pension age.
Where trustees wish to allow transfers of only part of any one of the above categories of benefit, no statutory members' right will exist. It may, therefore, be necessary to amend the scheme rules to allow such practice and to ensure that the trustees are discharged for any such non-statutory transfer.
In order to protect members' financial interests before transferring from a DB Scheme to a DC Scheme, transfers will be subject to two safeguards:
- From 6 April 2015, individuals who wish to transfer "safeguarded benefits" - benefits other than money purchase benefits and cash balance benefits - to a DC Scheme to access flexibility, will be required to obtain "appropriate independent advice" from an FCA-authorised adviser. These new requirements only apply where the total value of the member’s DB Scheme benefits is £30,000, or more.
- Trustees will be required to "check" whether members have attained the appropriate independent advice before transferring or converting to benefit from flexibility.
The cost of such advice will be paid for by an employer, where appropriate, with permitted tax breaks. Further, we understand from the industry that many receiving schemes will insist on being provided with evidence of a positive recommendation to transfer.
A new guidance guarantee is introduced so that all DC Scheme members are offered free, impartial guidance on the range of options available at retirement. This is being delivered by the Pensions Advisory Service and Citzens Advice Bureaux. However, this is only generic guidance and is not to be confused with regulated advice, with a tailored recommendation, which would be provided by an independent financial adviser.
Pension Scheme Definitions
The PSA 2015 introduces new definitions to the legislative framework for private pensions based on the different types of pension promise offered to members during the accrual period. This is to facilitate the introduction of shared risk schemes and collective benefits.
A DB Scheme is a scheme in which the member has a full pensions promise about the rate of the retirement income they will receive for life from a fixed normal pension age; a shared risk scheme is where there is a promise in relation to some of the retirement benefit that members might receive, whether a retirement income or a retirement lump sum; and a DC Scheme, where there is no promise during the accumulation phase in relation to any of the retirement benefits that may be provided to members.
The PSA 2015 also includes measures to support the use of collective benefits. Such schemes are commonly used in the Netherlands, Canada and Denmark where evidence suggests they can, when governed appropriately, provide a greater degree of stability in pension outcomes than individual defined contributions schemes. Until now, collective benefit schemes were not possible in the UK because they were not catered for in either pensions or tax legislation.
Collective benefits allow members to share and pool a range of different types of risk with other members, both in the accumulation phase and the pay-out phase. Members share risk within a shared asset pool that enables pension schemes to weather poor economic conditions.
From an employee's point of view, there is a target for what he or she will receive on retirement, but there is no guarantee that workers retiring will actually receive the target proportion of their salaries.
Critics argue that the Netherlands has a very different social structure from the UK, so collective schemes might prove difficult to run here as they need scale to exceed.
Clyde & Co comment
The most significant part of the Act are the changes to accommodate the impact of the Taxation of Pensions Act. This is radical change to the way in which pensions have been treated and over the long term will shift the strategies for retirement saving and the products on offer from pension providers.
However, the ability to introduce shared risk schemes has received a lukewarm response from the pensions industry. It must be questioned whether employers - who have been burned by experiences with DB Schemes - would ever want to shift back from DC Schemes which place all of the investment risk on the member. Steve Webb, the Pensions Minister, has acknowledged that the demand may not be great now but the legislation will allow the market to develop such schemes in the future. But it may be sometime before that demand develops.