Freedom & Choice in pensions: Appropriate independent advice on DB to DC transfers and conversions

Introduction

With the Government’s reforms allowing DC pension savers greater freedom and choice over their retirement options due to come into force from 6 April 2015, the DWP has published a further set of draft regulations designed to protect DB members when transferring to, or converting their benefits into, DC.

In this Alert

• Key points
• Background
• When will trustees need to check whether appropriate independent advice has been received?
• What steps will trustees need to take?
• Exception and transitional provisions
• Next steps

Key points

• The draft regulations will require trustees to check that a member (or survivor) has received “appropriate independent advice” in relation to DB to DC transfers or conversions.
• Although the member (or survivor) will generally have to pay for that advice, the employer will be on the hook in certain circumstances.
• The new requirements do not apply where the total value of the member’s (or survivor’s) DB benefits under the pension scheme is £30,000 or less.
• The regulations are due to come into force on 6 April 2015.

Background

First announced in the 2014 Budget, the new DC flexibilities will be implemented under the Taxation of Pensions Act 2014, which amends existing pensions tax legislation, and the Pension Schemes Act 2015, which received Royal Assent on 3 March 2015.

Having originally toyed with the idea of limiting DB to DC transfers in the light of the new flexibilities, the Government confirmed in July 2014 (see our Alert) that, except in respect of pensions already in payment and in the case of transfers from unfunded public service DB schemes to DC, transfers between DB and DC pension schemes could continue.  However, such transfers (or conversions) from DB to DC will be subject to two new safeguards:

• the need for transferring trustees to check that appropriate independent advice has been taken by the individual concerned (the subject of the draft regulations), and
• TPR guidance for trustees on DB to DC transfers and conversions, including the use of their existing powers to delay transfer payments and to take account of scheme funding levels when deciding on transfer values (see our Alert for further details).

When will trustees need to check whether appropriate independent advice has been received?

General

The draft regulations deal with the implementation of section 48 of the Pension Schemes Act 2015 and will require trustees of a pension scheme with “safeguarded benefits” (namely, DB benefits) to check that appropriate independent advice has been received by a member (or survivor) before carrying out a “relevant transaction”, namely:

• converting any DB benefits into “flexible benefits” under the scheme
• making a transfer payment in respect of any DB benefits with a view to acquiring a right or entitlement to flexible benefits for the member (or survivor) under another pension scheme
• paying a lump sum that would be an uncrystallised funds pension lump sum (UFPLS) in respect of any DB benefits.

As the name suggests, “flexible benefits” are the benefits to which the new flexibilities will apply, including DC and cash balance arrangements.  “Appropriate independent advice” is advice from a professional financial adviser who is both independent of the DB scheme and authorised by the FCA.

Where required to do so, trustees who fail to take reasonable steps to check that appropriate independent advice has been received may be liable to civil penalties.

Who should pay for the advice?

Generally, a member (or survivor) will need to arrange and pay for their own appropriate independent advice.

However, the draft regulations set out an important exception to this general rule, requiring an employer to arrange and pay for the advice where it sends out a communication to two or more members (or survivors) setting out options “in terms that encourage, persuade or induce the member or survivor to request that the trustees…carry out a relevant transaction”.  This provision is quite broadly drafted and potentially captures a wide spectrum of employer communications.  As civil penalties may be imposed on an employer for breach, it will be important to see how TPR interprets it in practice.

Where an employer is required to pay for appropriate independent advice, no liability to income tax will arise in respect of it for an employee (or former employee).

What steps will trustees need to take?

Information to members (or survivors)

When faced with an application for a statement of entitlement to DB benefits or, for example, a written request as to how to carry out a relevant transaction, transferring trustees will need to provide the member (or survivor) with certain information within one month.

In particular, trustees must explain in writing that, unless the £30,000 advice exemption outlined below applies, they are required to check that  appropriate independent advice has been received by the member (or survivor) before they are able to carry out a relevant transaction.  In addition, the trustees must explain that the member (or survivor) will need to provide confirmation of this in a specified form within three months beginning with the day on which:

• a statement of entitlement is provided, or
• in the absence of such a statement, the trustees confirm in writing that they “agree in principle to carry out the relevant transaction requested” or, if later, the day on which the trustees provide the member (or survivor) with a valuation of their DB benefits.

What will constitute “an agreement in principle” is unclear from the draft regulations.

Form of confirmation

The member’s (or survivor’s) confirmation that appropriate independent advice has been received must be in the form of a statement in writing from the authorised independent adviser which includes the following:

• the member’s (or survivor’s) name and that of the scheme in which the member (or survivor) has DB benefits to which the advice given applies
• confirmation that advice has been provided which is specific to the type of transaction proposed by the member (or survivor)
• the FCA authorisation number of the company or business in which the adviser works.

Once they have received the above confirmation, trustees will need to check that the company or business has permission to provide the advice against the Financial Services Register maintained by the FCA.  However, it is important to note that trustees are not responsible for checking what advice was given to the member (or survivor) or that any recommendation is being followed.

Exception and transitional provisions

Trustees will not be required to carry out the checks described above where the total value of the member’s (or survivor’s) DB benefits under the pension scheme is £30,000 or less (this figure corresponds with the trivial commutation limit under tax legislation).

In addition, under transitional provisions, the draft regulations will not apply to DB transfers or conversions where:

• the transfer payment is made on or after 6 April 2015 but the member’s application for a statement of entitlement in respect of a statutory CETV was made before that date
• before 6 April 2015, the trustees confirmed in writing to the member “that they agree in principle to carry out the transfer payment” (subject to relevant legislative and scheme rule requirements being met) or the trustees made an offer in writing to the member of a transfer payment
• the conversion of DB benefits takes place on or after 6 April 2015 but the trustees provided written confirmation to the member before that date that they would convert the benefits.

Next steps

Whilst substantive changes to the draft regulations are unlikely at this stage, they are still subject to Parliamentary approval.

Although we are now into the freedom and choice finishing straight, we are currently awaiting TPR’s final guidance on DB to DC transfers, as well as guidance prepared or approved by TPR explaining the characteristic features of the various flexible benefit options as anticipated by the recently published draft disclosure requirements (see our Alert).