In the April edition of Pensions Pieces we referred to the new statutory requirements in relation to the transfer of 'safeguarded rights' (essentially defined benefits, but also certain benefits with guarantees attached) over £30,000 to defined contribution pension schemes, where the purpose of the transfer is to access the new pension flexibilities which were introduced in April this year.
As a reminder, before making transfers, trustees of transferring schemes must check that the member has received "appropriate independent advice", among other things. Although it is all rather involved, it is important to unravel what this actually means. Simply put, the person giving the advice must be authorised to do so by the Financial Conduct Authority ('the FCA') and added to that, the firm must have, what are known as, the necessary permissions to do so. This is because giving "appropriate independent advice" has, effectively, been brought within the financial services regulatory framework and as such is a regulated activity; in this case, the specific activity is advising of the conversion or transfer of "safeguarded rights" into flexible benefits. A point of note is that in addition to the authorisation requirements, the FCA imposes rules on advising firms, such as stipulating when pensions transfer advice needs to be provided by or checked by a "pensions transfer specialist". We expand on the practical relevance of these elements below. All this ties into other changes introduced by the new pensions legislation (referred to in our April 2015 article).
In recognition that the wider changes in relation to transfers meant that its own transfer rules for advisers needed amending, the FCA, in March 2015, issued a consultation on proposed amendments and in June published its policy statement on the proposed changes to the FCA pension transfer rules, feedback on CP15/7 and final rules (PS 15/12). The main points of that policy statement are:
- transfers from DB pension schemes to occupational DC pension schemes have now been brought within the remit of the FCA transfer rules. Before, it was only transfers from DB schemes to contract based DC schemes, i.e. personal pensions that were covered;
- the advice which members must obtain before being able to take a transfer of their 'safeguarded rights' described above must be from an adviser who is suitably qualified and more particularly from a 'pension transfer specialist'. From 8 June 2015, pension transfer specialists must be involved in a number of situations which were previously not covered. It is notable that this requirement now applies even where the purpose of the transfer is to crystallise benefits, which was not the case prior to these amendments.
- a pension transfer specialist must also give advice on the conversion of safeguarded benefits into flexible benefits, including within the same scheme, or the payment of an uncrystallised funds pension lump sum.
These changes are aimed at aligning the FCA rules with the requirements prescribed in relation to the transfer/conversion of safeguarded rights, but the biggest challenge will be whether or not there are enough advisers with the necessary qualifications and/or who are willing to give the advice required and also at a cost which is not prohibitive.
The policy statement has also:
- confirmed that the FCA has issued a factsheet (number 35) on the position of 'insistent clients' (i.e. where an individual wants to proceed with a transaction against advice and wants the adviser to facilitate the transaction nevertheless), which contains questions and answers and examples of good and bad practice.
- following concerns about how 'safeguarded benefits' are defined in the legislation (and so it being unclear what fell within this category) confirmed that the DWP has said it will work with the FCA to engage with the pensions industry over the coming months to identity and publish broad categories/themes so that providers can identify safeguarded benefit categories and apply the advice requirement accordingly.
- confirmed that later this year, as part of its broader review of its handbook rules the FCA will consider whether or not there should be a full review of its transfer requirements, recognising that the retirement options have changed significantly since these were introduced.
- pointed out the difficulties for overseas persons in relation to the advice requirement, noting that there is no exemption in relation to such people. What this means is that such members would need to seek advice from an FCA authorised adviser who may not know about the individual's local pension and tax rules. That, in turn, could necessitate having to take advice from a local overseas adviser as well, which could make the whole process expensive and cumbersome. The FCA has confirmed that it has raised this issue with the DWP which has said it will work with the FCA and industry to determine whether or not any amendments are required to ensure that the advice requirements operate as intended in relation to overseas residents.
It is also worth bearing in mind that the Government has issued a consultation on ways of addressing charges levied on members accessing their pensions as part of a general review of how to make using the new pension flexibilities easier (now that difficulties with this have emerged since the new flexibilities became available). As part of this, the Government is also consulting on ways to make the process for transferring pensions from one scheme to another "quicker and smoother". This includes gathering evidence on how the advice requirement for safeguarded benefits is being applied and how this interacts with schemes and providers' decisions on requiring advice (which in some circumstances appears to be extending beyond what is strictly required by law). The Government has said that it will examine evidence gathered on this (and by the FCA and the Pensions Regulator which are consulting on similar areas) before deciding the next steps in this area.
So what does this all mean for transferring pension schemes ?
For now, pension schemes providing safeguarded benefits need to be aware of the checks and notifications they need to make in connection with any conversion or transfer of those benefits (and particularly the 'advice' requirement if the benefits are above £30,000).
The regulations say that trustees or managers of pension schemes will be subject to civil penalties under s10 of the Pensions Act 1995 if they fail to 'take reasonable steps to ensure that the check [that the transfer advice has been obtained] was carried out'. So what might those reasonable steps be ?
- verify that the firm is authorised AND that it has the necessary permissions to give advice on the specific type of pensions transfer in question. It is possible to check the permissions of advisers on the FCA Register which is a public register and accessible for free. It would therefore be prudent for trustees/managers to check this register to ensure that the details tie with the written confirmation that the adviser is required to provide in relation to his/her permissions and that the relevant permissions are indeed in place;
- confirm that the scheme's internal procedures or those of any third party administrators are geared up to make these checks and that the checks on both the authorisations and the permissions elements are actually carried out;
- as part of the due diligence during selection of the third party administrator and the on-going oversight and audit of the relationship, carry out quality control on this function;
- bear in mind that, "independent advice" in this context should not be conflated with the well-known financial services concept of "independent advice"; in the pensions context, the adviser merely needs to be independent from providers of the transferring and recipient schemes;
- record keeping processes should also include storing a copy of the letter so there is a record of the name and the authorisation details of the adviser.
In general, schemes' administration systems need to be geared up to deal with the requirements in relation to transfers in this context (some of which have statutory timescales attached to them) and also to deal with member queries about what they need to do for a transfer to proceed, guarding against any temptation to provide financial advice (which of course trustees are not authorised to give).
So the area of transfers continues to be a challenge for all parties involved in that process. The Government is clearly concerned that transfers should be able to take place with minimal difficulty for members – particularly where members wish to access the new pension freedoms in the DC context. However, the legislation and new rules on advice in connection with such transfers above £30,000 try to address protecting members from making ill informed decisions, but they add complexity to the process in the advice requirement.
The most difficult question is perhaps where members insist on taking transfers against independent financial advice. The recent Pensions Ombudsman decisions in relation to pension liberation cases (see our article on this here) where the members failed in trying to hold the scheme manager liable for the consequences of carrying out transfers to schemes that later turned out to be bad decisions may give trustees some comfort here when carrying out transfers on member instructions1. Nevertheless, here trustees are subject to a specific statutory requirement to carry out certain checks in relation to advice as described above and trustees may be found wanting, if their processes are not adequate to comply with this requirement. This is why it is important that trustees/managers understand what is required and ensure (with their administrators if necessary) that their systems are set up to deal with this properly.