Freedom & choice in pensions: Ensuring the new rules work in practice

Introduction

With Government reforms allowing DC pension savers greater freedom and choice over their retirement options set to come into force on 6 April 2015, the DWP has published three sets of draft regulations which will make a number of consequential changes to occupational pension scheme legislation.

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 Bill currently before Parliament.

Key points

Among other things, the draft regulations introduce the new concept of “flexible benefits” (covering the types of benefits to which the new pension flexibilities will apply) and make consequential changes to the requirements governing transfer values and disclosure.
Where members have a right to take, or to transfer, flexible benefits from 6 April 2015, new information requirements are designed to ensure that they have a full picture of the available options and related tax consequences.
A modification power will be introduced, allowing trustees, with employer consent, to amend scheme rules by resolution.
The regulations are due to come into force on 6 April 2015.

Transfer values

For various reasons, few occupational DC schemes have so far taken steps to introduce the new flexibilities. Complexity of administration and the fact that the new rules are still in the process of being finalised are just two of the explanations for the relatively low levels of take-up to date. For many DC and DB scheme members, this will mean taking a transfer from their occupational pension scheme in order to access the new flexibilities.

The Pension Schemes Bill includes a number of extensions to the existing rules on pension scheme transfers. In addition, the draft Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2015 have been designed to ensure that the transfer process continues to operate smoothly. As well as making a number of consequential amendments, the regulations:

introduce a requirement that, where a member applies for a statement of entitlement in respect of more than one category of benefit (other than DC benefits), the trustees must provide a separate CETV for each category
extend the time limit for making a CETV application in certain circumstances, for example where the CETV is reduced or increased
ensure that, where the trustees are not under an obligation to check that a member has taken appropriate independent financial advice (for example, because the amount being transferred is less than a specified amount), the trustees nonetheless make a recommendation that the member should take such advice
seem to provide a transitional provision so that any statutory DB CETV requests made before the regulations come into force on 6 April 2015 can continue to be processed on the basis that trustees recommend financial advice be taken (the current requirement), as opposed to the new obligation to check that the member has received appropriate independent financial advice.

For more on transfer rights from 6 April 2015, please see our Alert.

Disclosure

The Pension Schemes Bill will establish a new pensions guidance service which is designed to help pension scheme members and their survivors decide what to do with their flexible (DC) benefits. “Pension Wise” is a free and impartial government service which went live in February 2015, providing individuals with a six-step process on how to turn a DC pot into retirement income.

In tandem with this new service, the draft Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2015 outline the responsibilities for trustees and providers in communicating the new flexibilities. Among other things, the regulations:

stipulate the information which must be given to members who have flexible benefits (including the opportunity to transfer them), the circumstances in which this information must be given, and the time limits for issuing the information
set out a number of statements which need to be given to members with a right to transfer flexible benefits, including a statement that different options have different features, different rates of payment, different charges and different tax implications
make clear that trustees will have to provide members who have a right to transfer flexible benefits with either a copy of guidance prepared or approved by TPR explaining the characteristic features of the various flexible benefit options, or “a statement that gives materially the same information as that guidance”
list the information to be given to members in connection with the new pensions guidance service, including details as to where the service can be accessed
introduce transitional provisions to ensure that trustees do not need to revisit information already sent to members.

Consequential amendments

The Occupational Pension Schemes (Consequential and Miscellaneous Amendments) Regulations 2015 will introduce a modification power allowing trustees, with employer consent, to amend scheme rules by resolution to:

provide the new flexible benefit options, including drawdown and cash lump sums (referred to under the tax legislation as an “uncrystallised funds pension lump sum” or “UFPLS”)
allow members to convert non-DC flexible benefits to DC in order to take advantage of drawdown
enable members to nominate nominees and successors to receive benefits on death, in addition to dependants
provide for the payment of a drawdown pension fund lump sum death benefit or a flexi-access drawdown fund lump sum death benefit
ensure that trustees are not required to make a transfer of DB benefits where they are unable to carry out a check that the member or survivor concerned has received appropriate independent financial advice or, where they have carried out such a check, that did not confirm that the required advice had been received.

In addition, the regulations will introduce changes to the preservation and contracting-out regulations to ensure that flexible benefits can be paid.

Next steps

The three sets of regulations, which are due to come into force on 6 April 2015, have been published in draft with a view to giving the pensions industry sufficient time to plan their implementation. Whilst we do not expect substantive changes at this stage, the regulations are still subject to final legal checks and Parliamentary approval in early March 2015.

However, this is not the end of the freedom and choice story. Not only can we expect a further set of regulations relating to advice on transfers from DB to DC, but it is also clear that further guidance from TPR will be forthcoming.