In the run up to 6 April 2015, the focus has been on defined contribution (DC) members and the new flexible options available to them. This focus has now begun to swing to the (potentially significant) number of defined benefit (DB) members who will seek to transfer their rights in order to take advantage of these new flexibilities.
To this end, trustees of DB schemes must ensure that their adminstrators have taken the necessary steps to prepare accordingly and to take into consideration any impact on transfer-related Service Level Agreements.
Recent press items suggest that we are about to see an avalanche of transfer activity descend upon DB pension schemes.
The Financial Conduct Authority (FCA) have confirmed their expectation that a third of DB members will take a transfer. In addition to this there will also be a significant number of DB members who having been provided with transfer details on request, will decide not to proceed with a transfer.
The Pension Schemes Act has changed the way that the statutory right to a cash equivalent transfer value will operate going forward and this will assist individuals in taking advantage of the Budget flexibilities where their own schemes are not offering them. The new legislation identifes three “categories” of benefit:
A key change is that the right to a cash equivalent will now operate on a category basis.
- Money purchase i.e. DC
- Flexible benefits that are not money purchase e.g. cash balance
- Benefits that are not flexible i.e. DB
This means that there will be a statutory right to take a partial cash equivalent, in respect of the accrued benefit for any particular category.This is particularly useful for members with both money purchase and non-money purchase benefits in the same scheme e.g. AVCs in a DB scheme. The upshot is that these members will now have a statutory right to transfer their AVCs to a new arrangement, whilst leaving their DB benefits in the transferring scheme.
From 6 April, if a DB member wishes to transfer their rights to acquire the flexible i.e. DC benefits, the Pensions Regulator (tPR) has confirmed that transferring trustees will be obliged to check that the member has received “appropriate independent advice” from an FCA authorised adviser, before making the transfer. Advisers will be required to provide members with a written confirmation to enable the trustees to check appropriate advice has been given. Members will be expected to meet the cost of this advice , except where it has been instigated by their employer.
The advice requirements will only apply where the cash equivalent transfer value of the DB benefits being transferred is more than £30,000. It is worth noting that there is no requirement for a member to have received “positive advice” before the transfer can proceed. Trustees will not be responsible for checking what advice was given, what recommendation was given or to confirm whether the member is following that recommendation. Trustees must ensure that their administrators are aware of this requirement and agree with them how best to perform/record this check.
The tPR have launched a new campaign to help members scam-proof their savings.
The tPR has updated the scorpion leaflet which is to be issued to any scheme member who requests a transfer. This comes, as fears mount that the new freedoms could present further opportunities for pension scammers.
In additon, tPR has also confirmed that it expects trustees to carry out “proper due diligence” on the receiving scheme to ensure that it is a legitimate arrangement. Trustees must ensure that their adminstrators have a process in place to check for the warning signs of pension scams. If these warning signs are present, tPR’s action points must be followed.
In order to service the volume of anticipated transfer requests, trustees need to ensure that their administrators have the capacity to process these transfer requests within agreed Service Level Agreements.
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This will involve making use of current technology which enables both transfer requests and associated documentation to be automatically produced at the push of a button. Trustees need to be satisfied that such software is in place and has been fully tested in advance of the 6 April changes.
There is no doubt that there will be an increase in transfers from DB schemes to DC schemes as members see the greater flexibility available under DC arrangements.
Ahead of 6 April 2015, DB trustees must ensure that their adminstrators have taken action to address the following:
- Advise members of the new options available e.g. members with AVCs
- Ensure that relevant transfers (i.e. more than £30,000) do not proceed without the member receiving “appropriate independent advice”
- Implement a robust checking process to avoid the risk of fraud
- Ensure an automated administration system is in place to produce transfer values and associated documentation within agreed Service Level Agreements
Trustees should be under no illusions as to the potential adverse impact on their membership if these actions are not in place by 6 April 2015.