DB to DC transfers and conversions – Sackers’ response to consultation

Background

On 12 February 2015, TPR published a consultation on guidance for trustees of DB schemes on member requests for transfers from DB to DC schemes.

Among other things, the draft guidance aims to:

• help trustees ensure they have appropriate processes in place to manage transfer requests
• prompt trustees to consider the impact of transfer values as part of an integrated approach
• require trustees to provide clear information for members so that they can get independent advice on the best option for them.

In this response

• General comments
• Introduction
• The requirement to take appropriate independent advice
• Due diligence on the receiving scheme
• Communications
• Applying for an extension of time

General comments

We welcome the introduction of new guidance to help DB pension scheme trustees manage requests for transfers to DC arrangements and the conversion of DB benefits to DC.

We have a number of comments and questions on different aspects of the draft guidance, which we set out below.

Introduction

Paragraph 7 of the draft guidance refers to the statutory right for members to request a transfer of their pension benefits.  In our view, this paragraph would benefit from further explanation of members’ statutory rights with effect from 6 April 2015, to ensure that the distinction relating to rights in relation to safeguarded and flexible benefits is clear.

As set out in the draft guidance, the statutory right to a CETV applies in relation to safeguarded benefits when a member is more than one year away from their scheme’s normal pension age.  By contrast, for a member with flexible benefits, the right to a CETV applies up to the date of crystallisation of benefits.  Given the various permutations as to when a statutory right exists depending on the categories of benefits held, as well as the emphasis in the media on the new rights in relation to flexible benefits, it would be helpful to explain the distinction in more detail in the guidance.

The requirement to take appropriate independent advice

Under the Pension Schemes Act 2015, a member with safeguarded benefits will be required to seek appropriate independent financial advice before converting their benefits into flexible benefits, transferring their benefits in order to access flexible benefits or paying an uncrystallised pension lump sum.

When a member obtains appropriate independent advice, the adviser will be required to provide the member with confirmation in writing, which the member then submits to the trustees to enable them to check that the appropriate independent advice has in fact been obtained by the member.

We welcome this requirement.  Ensuring that the responsibility to provide this confirmation lies with the individual and their adviser will be very helpful to trustees.  It is also helpful that trustees are required to check only that advice has been given, rather than the substance of the recommendation and whether or not such recommendation has been followed.  In our view, to require trustees to delve into the advice itself would be to impose an undue burden on them.

In connection with the adviser’s confirmation, we note that this must include a number of statements regarding the adviser’s authorisation, including, at 23a, the fact that they have permission to carry out the relevant regulated activity.  Then at paragraph 25, the draft guidance goes on to say that, before a transfer is made, “a check must be made by the trustees on the adviser’s details on the Financial Services Register maintained by the FCA” [our emphasis].  Given that draft Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) Regulations 2015 refers to the check being made on “the company or business providing that advice…”, it would be helpful for the guidance to use consistent terminology, so that trustees are clear whose details they need to check.

It should be noted that where the intended receiving scheme is a QROPS, any financial adviser involved may be based (and registered) outside the UK.  As such, a check against the FCA’s register may not give trustees the necessary confirmation.  It would be helpful to include in the guidance, details as to how trustees can check overseas’ financial advisers’ credentials.

In connection with checks carried out by trustees on advisers, it would be helpful for the guidance to explain TPR’s expectations of trustees in terms of record keeping.  For example, where online records are checked, will a screen shot suffice, which shows the date on which the check was made?  And how long is it expected that trustees will keep such information for?

It is unclear what is intended by the need “to conduct periodic additional checks, for example through further communication with the adviser directly”.  In our view, any “periodic additional checks” are likely to amount to an undue burden on trustees – we consider that this wording should be deleted.  If this requirement is retained in the guidance, clarification / examples of TPR’s expectations here will be essential.

The references in the draft guidance to the de minimis requirement for seeking appropriate independent advice are incorrect.  The introduction refers to the requirement applying for scheme members with safeguarded pension benefits of “£30,000 or more”, whereas paragraph 20 refers to the initial CETV being “less than £30,000”.  The draft Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) Regulations 2015 provide that trustees are not required to carry out the check if the total value of the member’s or survivor’s subsisting rights in respect of safeguarded benefits under the pension scheme is £30,000 or less on the valuation date” [our emphasis].  The latter figure ties in with the limit for trivial commutation under the tax legislation.

Due diligence on the receiving scheme

At paragraph 36, the draft guidance notes that “Members may be unaware of whether they have safeguarded or flexible benefits (or both) in their scheme and the associated requirement to take advice”.  In a similar vein, we consider that it can be difficult for trustees to determine what kind of arrangement the receiving scheme is.  Recent investigations by TPR and the Pensions Ombudsman demonstrate that certain schemes appear to have been established as occupational pension schemes, some of which appear to provide safeguarded (ie DB) benefits.  In such circumstances, it may be difficult for trustees to determine whether or not the requirement for appropriate advice is triggered, notwithstanding that they have carried out thorough due diligence.  It would therefore be helpful to include in the guidance a requirement for any individual requesting a transfer to confirm the status of the receiving scheme.

Placing the onus on the individual and their adviser in relation to the new financial advice requirement raises interesting questions as to where the responsibility for due diligence lies.  Whilst trustees clearly have a statutory duty to ensure that any receiving scheme is a legitimate arrangement to which they can transfer an individual’s benefits, there is a risk that some trustee boards may see confirmation of a member having taken financial advice as a substitute for their own due diligence.  Paragraphs 35 and 36 of the draft guidance and the cross reference to TPR’s guidance on pension scams are therefore a useful reminder of trustees’ duties in this regard.

In our view, in addition to outlining TPR’s expectation that trustees “conduct proper due diligence on the receiving scheme to ensure that it is a legitimate arrangement”, it would also be worth emphasising the fact that trustees have a statutory duty, irrespective of the proposed transfer amount, to ensure that any proposed receiving scheme meets the prescribed legislative requirements.

Reference could also usefully be made here to the new Code of Good Practice on Combating Pension Scams.

Communications

The draft guidance explains that communications (such as the scheme booklet) should be reviewed and updated to explain the impact of the new pension flexibilities.

We consider that it would also be helpful to specify:

• that pre-retirement literature will also need to be updated
• how DC AVCs within a DB scheme should be treated, whether these are a member’s sole benefits or in addition to a member’s main scheme benefits.

We note that TPR’s draft essential guide to communicating with members about pension flexibilities sets out good practice suggestions for communicating with members about their retirement choices and example risk warnings that trustees can provide to members in respect of the four main retirement options. It would be helpful to cross-refer to the new guide in the transfers and conversions guidance, together with clarification of the extent to which the new communication requirements and risk warnings are intended to apply, in particular, to conversions.

Applying for an extension of time

Trustees may apply to TPR for an extension of the time limit for effecting a transfer, for example where further time is needed to clarify the status of the receiving scheme.

Paragraph 42 of the draft guidance notes that trustees may decide not to proceed with a transfer request where advice has been obtained “but the check could not confirm this, or the trustees could not perform the check due to factors outside their control”.  It would be helpful for trustees if the guidance included some examples of the circumstances that TPR has in mind here.

It would also be useful to clarify in the guidance the overall time limits for implementing a transfer, in particular, the point at which the clock starts running for trustees in connection with the implementation period.