Pension transfers and early exit charges: consultation

Introduction

The Government issued a consultation on 30 July 2015, seeking views on options to address possible barriers to people switching their pensions to access the new DC freedoms including, excessive early exit penalties, the transfer process and the circumstances in which someone should seek financial advice.

Key points

If there is evidence of excessive early exit charges restricting individual’s ability to access the new freedoms, the Government will consider imposing a cap on such charges for those age 55 and over.
The Government is considering how to make the process for pensions transfers smoother and more efficient.

Background

New retirement options for DC pension savers came into force on 6 April 2015. The Government wants to ensure that individuals can access these new flexibilities “easily, and at reasonable cost”. It is therefore keen to gather more evidence and, where appropriate, explore ways to strengthen people’s rights to access their pensions flexibly, and remove any unjustifiable barriers to their doing so.

Alongside this consultation, the FCA and TPR are carrying out a comprehensive evidence gathering exercise, including on the existing processes for pension transfers and any fees and charges that members might incur for leaving their scheme early.

Early exit charges

One of the key principles of the new pension freedoms is that individuals should be able to access their pension savings in order to use them in a way that suits their needs. This includes customers being treated fairly by their providers and being allowed to access their savings free of disproportionate penalty charges.

The consultation defines exit charges as “those fees and charges incurred when a customer transfers out of their pension into another fund or scheme, or otherwise accesses their pension flexibly before a date specified in the personal pension contract or, in the case of an occupational scheme, the scheme rules.” However, as early exit fees can arise from a number of things (including administrative costs to the provider, or charges related to the divestment of certain assets), there is no single working statutory or regulatory definition.

If there is clear evidence of excessive early exit fees and charges, the Government has identified three options to address this:

a cap (fixed percentage or monetary amount) on all early exit fees
a flexible cap in certain circumstances
allow the industry to take the lead. For example, give trustees scope to waive or reduce early exit charges where members move from an existing arrangement to another offering flexibility.

However, the Government states that any option which could cut across existing contractual property rights, such as a statutory cap, would represent a “significant step” and “should only be taken as a proportionate means of achieving a legitimate objective in accordance with the public interest”.

Pension transfers

To ensure that people would be able to take advantage of the new flexibilities, even where their scheme chose not to offer such options, from April 2015 the Government extended transfer rights for individuals with flexible benefits (see our Alert). Those with “safeguarded” (broadly DB) benefits are also able to convert those into flexible benefits should they wish.

The Government is considering how the current transfer process can be made smoother and more efficient. However, it acknowledges that schemes must be given sufficient time to carry out due diligence, both to prevent members becoming victims of pension scams and to make sure they understand the implications of the decisions they are taking.

The consultation asks for views on how the current system is working, what scope there is for imposing a standard process, and whether that process should be limited to transfers in relation to flexible benefits. In particular, it considers whether sufficient change could be achieved on a voluntary basis, backed by industry commitments.

Financial advice

While keen to allow individuals to access the new freedoms if they wish to do so, the Government introduced a layer of protection from 6 April 2015 for those with safeguarded benefits (see our Alert). Unless the total value of the member’s (or survivor’s) DB benefits under the pension scheme is £30,000 or less, the scheme’s trustees must check that the member (or survivor) has received “appropriate independent advice” in relation to a DB to DC transfer or conversion before they carry out the transaction.

The Government is concerned that there may be insufficient clarity as to when individuals should be required to take financial advice. In addition, it wants to understand whether the process for ensuring individuals appreciate the need for and importance of financial advice is operating as intended.

Next steps

The consultation closes on 21 October 2015. The Government intends to publish a response in the autumn.