Pension transfers and early exit charges – Sackers’ response to consultation

Background

HM Treasury issued a consultation on 30 July 2015, in which it seeks views on options to address possible barriers to individuals wanting to change existing pension arrangements in order to access the new pension freedoms. Among other things, the consultation considers excessive early exit penalties, the transfer process and the circumstances in which someone should seek financial advice.

General comments

We support the Government’s aim of giving full effect to the pension freedoms, while ensuring that members are both adequately protected and not unnecessarily impeded in their access to flexible benefits. We therefore welcome the opportunity to comment on HM Treasury’s present consultation.

In our comments below, we focus on the areas most relevant to our practice and have not sought to answer every question in the consultation.

Early exit charges

The consultation asks “what would constitute an ‘excessive’ or unfair early exit charge”. Whilst we do not seek to comment on quantum, we note that this will depend on the type of arrangement in question.

As the consultation explains, there are significant numbers (around 7% (or £4.8 billion) of assets under management) of legacy arrangements. Many of these have what could generally be regarded as significant exit charges – nearly 60% of funds (£3.4bn) is invested in schemes with early exit charges of 10% or more.

We fully support moves to ensure that members are not impeded from accessing the new pension freedoms, and agree that exit charges are an important factor to consider. However, it should be borne in mind that many legacy arrangements were set up long before the new pension freedoms were in contemplation. This means that the associated exit charges, which may relate to initial set-up and other costs, will have been contractually agreed between the parties years, or even decades, earlier. In our view, therefore, it will be important to distinguish between long-standing arrangements and those which have taken on new business in the wake of the announcement of the new pension freedoms in the 2014 Budget.

We note the publication by the Pensions Regulator (TPR) in September 2015 of the report of the findings on the 2015 research survey on Flexible Pension Access and the Financial Conduct Authority’s (FCA) complementary request for data from pension and retirement income providers seeking information on: consumer access to the pension freedoms; financial advice requirements and the treatment of insistent customers; pension transfer procedures; and exit charges, the analysis and findings from which were published on 16 September 2015. We have no further comments to make on early exit charges at this stage.

Pension transfers

The process for transferring pensions from one scheme to another has come to the fore in recent months, for a number of reasons. Pension savers wishing to access the full range of the new pension freedoms may find that the only way to do so is by transferring out of their existing arrangement and into an alternative vehicle. In addition, with more awareness and engagement surrounding the risk of pension scams, due in no small part to campaigns by TPR and others, transfer processes are coming under closer scrutiny.

Requirement to obtain appropriate independent advice on DB to DC transfers

There are a number of areas of uncertainty surrounding the new requirement for financial advice, where a member with “safeguarded” benefits in excess of £30,000 requests a transfer with a view to obtaining flexible benefits.

Underpin benefits

Practical difficulties can arise in defining which elements fall within the definition of “safeguarded” benefits, for example, the treatment of “underpin” benefits which can affect whether (and when) a benefit is treated as DB or DC. Clarification would be welcome here.

Advice paid for by the employer

Clarification would also be welcome as to which elements of this advice must be paid for by the employer under regulation 12 of The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) Regulations 2015 (the Advice Regulations). In practice, is it intended that the requirement to pay for advice relates solely to advice on whether or not to transfer safeguarded benefits to a DC arrangement, or should it extend also to specific investment advice in relation to the ultimate product selected by the individual?

Overseas transfers

There is no exception to the advice requirement in relation to safeguarded benefits for transfers overseas. As the FCA notes in its June 2015 Policy Statement (CP 15/7), “In practice, a non-UK resident seeking to transfer pension benefits overseas will need to seek advice from an FCA-authorised adviser on the implications of proceeding with the transfer.”

Our experience is that this is leading to confusion in some cases as to what advice is covered. As with the requirement for advice paid for by the employer, is it intended that only advice on whether or not to transfer the safeguarded benefits falls within the requirement under section 48 of the Pension Schemes Act 2015 or does the requirement extend to the suitability of the qualifying overseas recognised pension scheme for the individual concerned?

We are aware that the DWP and the FCA are currently looking into this with a view to ensuring that the advice requirements operate as intended for non-UK residents. However, we flag the point here as we are aware of cases in which the confirmation needed under regulation 7 of the Advice Regulations has not been forthcoming; some FCA authorised advisers feel unable to give this where they are not advising on the overseas implications of such a transfer for the individual concerned.

Delays in the transfer process

Trustee boards and providers have generally increased the level of due diligence that is carried out in response to transfer requests, largely as a result of campaigns by TPR, the FCA and others highlighting the risks of pension scams. Due diligence exercises can therefore take significantly longer to complete because of the additional checks that are being carried out.

In the context of automatic transfers, the DWP’s framework for consolidating pension saving (published on 11 February 2015) proposes the use of a defined list of schemes. Whilst the automatic transfer proposals are generally on hold for now, we think that such a list could have wider value, in terms of assisting trustees and providers who are carrying out due diligence in response to transfer requests.

In addition, disinvestment, which will previously have been factored into the day-to-day running of a DB scheme, looks set to become a consideration as the number of transfer requests increases. It may therefore need to be factored in to the time for dealing with individual transfer requests.

The requirement for appropriate independent advice to be obtained in relation to safeguarded benefits over £30,000, combined with the time needed by individuals to review the advice they have received, can also stretch the time needed to deal with transfers.

The key is that trustees and providers deal with transfer requests in a reasonable timeframe, balancing the speed of the process against the need to ensure that transfers are dealt with safely and securely. The issues are generally more straightforward for transfers between two DC schemes or two DB schemes. Therefore, for DB to DC transfers, we would support a separate process, which would ensure that sufficient time could be devoted to each element of that process.