TPR consults on guidance for trustees on DB to DC transfers and conversions

Introduction

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.

In this Alert

• Key points
• Background
• General issues for trustees
• Draft guidance
• Next steps

Key points

TPR’s draft guidance aims to: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 to risk management of their scheme
• require trustees to provide clear information for members so that they can get independent advice on the best option for them.

TPR will expect trustees to confirm that a member has taken appropriate advice before making a DB to DC transfer but, crucially, does not consider trustees responsible for checking what advice was given, what recommendation was made or confirming whether the member is following that recommendation.

Background

The Government recognises that a desire to access the new flexible benefit options available in respect of DC pension savings from 6 April 2015 may lead to an increase in transfers from DB schemes.  Two headline risks were identified as part of the Government’s consultation process:

• members may choose to transfer their benefits when it is not in their best financial interests
• a large volume of transfers could destabilise a DB scheme.

The Government’s intention is to mitigate these risks with the following safeguards:

• a new requirement that, from 6 April 2015, scheme members with safeguarded pension benefits (broadly DB benefits) of £30,000 or more in their scheme who wish to transfer to a DC arrangement must first get appropriate independent advice from an FCA authorised adviser. This safeguard will be put in place by the Pension Schemes Bill 2014/15, which is expected to receive Royal Assent shortly (for further details on the proposed changes to members’ transfer rights, please see our Alert)
• guidance from TPR to DB pension scheme trustees on reducing a member’s transfer value and how to apply for more time to carry out a transfer in relation to DB to DC transfers.

General issues for trustees

The general issues TPR considers that DB trustees, with their advisers, are likely to face include:

• whether to commission a fresh assessment of the scheme’s funding position in light of the number of transfers and the extent of the need for a reduction in transfer values due to funding levels
• an increase in requests for information on transfer options
• more members choosing to transfer at age 55, or closer to retirement, causing a corresponding increase in the scheme’s liquidity requirements and an impact on investment strategy
• greater interest from employers in promoting such transfers to reduce their exposure to scheme risks
• some members choosing to transfer “although it is unlikely that this is in their best financial interests”
• awareness of a heightened or changing risk of pension scams.

TPR reminds trustees to ensure that the assumptions they use to calculate transfer values continue to be appropriate.

Draft guidance

Role of the trustee

The draft guidance reinforces the need for trustees to have procedures in place to implement transfer requests in a timely manner, and to maintain accurate and complete records of all requests received and transfers made.

Helpfully, TPR states that “it is not the trustee’s role to second-guess the member’s individual circumstances and choice to transfer safeguarded benefits.  Nor is it their role to prevent a member from making decisions which the trustees might consider to be inappropriate to the member’s circumstances”.  However, it suggests that trustees support members in making a fully informed decision by:

• providing information on finding FCA authorised advisers
• making them aware that the advice they obtain will be informed by their personal circumstances
• informing them that advice should explain benefits being given up when compared to any future options.

Appropriate independent advice

The requirement to take appropriate independent advice will apply to all requests received on or after 6 April 2015 for a transfer of safeguarded benefits (DB) to a flexible (DC or cash balance) arrangement, except where “the initial cash equivalent value of [the member’s] safeguarded benefits in the scheme is less than £30,000”.

Whilst trustees are not responsible for checking what advice is given or that any recommendation is being followed, according to the draft guidance, trustees must take the following key steps before making a transfer:

• ensure the member has provided the scheme with a signed confirmation which meets certain requirements (for example, it includes the adviser’s FCA registration number) from their independent adviser
• check the adviser’s details on the FCA’s Financial Services Register.

In addition, the draft guidance suggests that it may “also be sensible for the scheme to conduct periodic additional checks, for example through further communication with the adviser directly”.

Due diligence

TPR expects trustees to conduct “proper due diligence on the receiving scheme to ensure that it is a legitimate arrangement”.  Where trustees have reason to believe that the receiving scheme is not legitimate, TPR advises them to consider carefully whether the transfer should be made.  TPR’s guidance on pension scams includes a checklist of common indicators of a scam, as well as suggesting ways for trustees to make further enquiries.

Member communications

Trustees should review and update member communications, for example the scheme booklet, to explain the impact of the new pension flexibilities.  They should also ensure the member is:

• provided with the correct information when requesting a transfer and be wary, in particular, of implying that the transfer value offers “full” value for a member’s safeguarded benefits
• aware of the time limits which apply to his/her application
• aware of the trustees’ requirement to check that the member has received appropriate advice and that the trustees will request evidence.

Unsurprisingly, TPR encourages trustees to provide members with clear information about the risk of pension scams.

Extensions of time to comply with transfer requests

The draft guidance confirms that TPR is unable to waive a trustee’s legal duty to carry out a transfer within the statutory deadline and it may only grant an extension in limited circumstances.  For example, if the trustees have not been provided with the information they reasonably require to carry out the transfer, or if the interests of the members generally would be prejudiced.

In addition, the draft guidance makes clear that where the trustees have been unable to confirm that the member has taken appropriate advice, they need not proceed with the transfer.

Next steps

This consultation, which closes on 17 March 2015, is the first part of a package of communications aimed at helping trustees prepare for the April 2015 reforms.

In early March 2015, TPR intends to publish further guidance for trustees on the requirement to signpost to their members the availability of “Pension Wise” (the name given to the service which will provide the promised guidance guarantee).