The statutory regime covering workplace pensions will be transformed in April 2015. This is the culmination of sweeping reforms to defined contribution (DC) pensions aimed at providing savers with flexible access to their pension savings and changes to the DC governance and charges regime.
In this second alert in our four-part series on the reforms, our pensions experts focus on the impact for Defined Benefit (DB) occupational schemes - in particular, the issues trustees will need to consider around transfers from DB to DC schemes. Over the coming days we will take a closer look at what the future holds for the DC governance and charges regime, and also workplace pension reform.
DB to DC transfers
Members (and beneficiaries) in unfunded public sector DB pension schemes (e.g. NHSPS and Civil Service Pensions) will not be able to transfer to DC arrangements.
Members of private sector and funded public sector (e.g. LGPS) DB pension schemes will be able to transfer to DC arrangements subject to complying with a new safeguarding regime.
For transfer requests made on and after 6 April 2015, the trustees or managers of such schemes will need to consider the following questions:
1. Does the transfer request apply to 'safeguarded benefits'?
This covers all non-money purchase benefits. This includes defined benefits but does not include money purchase AVCs.
2. Will the transfer request give the member a right or entitlement to 'flexible benefits'?
Flexible benefits include money purchase benefits and cash balance benefits.
3. Does the value of the transferee's total subsisting rights to safeguarded benefits exceed £30,000?
The requirement to obtain 'appropriate independent advice' (see question four below) does not apply if the transferee's total subsisting rights to safeguarded benefits is less than £30,000.
4. If the answer to questions one to three is yes, has the trustee checked whether the member has received 'appropriate independent advice'?
The trustees must check that a member seeking to transfer 'safeguarded benefits' in excess of £30,000 to an arrangement that will give them a right or entitlement to 'flexible benefits' has received 'appropriate independent advice'. Trustees should not proceed on a transfer request until all of the checks have been carried out, confirmed and recorded.
Appropriate independent advice must:
- be specific to the type of transfer proposed by the member;
- be provided by a person authorised to conduct the regulated activity; and
- include the statements that are specified in the legislation.
The trustees need to check that the advice contains a signed written confirmation from the advisor confirming:
- the name of the member;
- the name of the receiving pension scheme;
- that the advice has been provided in respect of a DB to DC transfer;
- that the adviser is authorised by the Financial Conduct Authority (FCA) to advise on DB to DC transfers; and
- the adviser's FCA registration number.
The trustees also need to:
- check the adviser's registration number against the Financial Services Register and ensure that the details match up;
- check that the receiving scheme is a legitimate pension scheme; and
- keep a copy of the adviser's signed confirmation and a record of the checks that have been made by the trustees.
Because of the importance of these new checks, it is important for trustees to put a process in place to ensure these steps are carried out properly and recorded. We advise vigilance over the risk of pension liberation schemes and other scams. Trustees should seek legal advice if they have any questions.
Pension reforms - other issues for DB scheme trustees
Although the Budget 2014 pension reforms were focused on flexible access to DC pension savings, there are issues that DB scheme trustees should think about.
As well as implementing a compliant DB to DC transfer process (see above), DB scheme trustees should:
- review any DC benefits provided by their arrangements (e.g. DC AVCs);
- consider whether they will offer some or all of the possible flexibilities in respect of those DC benefits;
- consider whether their factors for lump sum benefits and transfer values are appropriate and keep these under review;
- review the DB scheme's transfer rules and consider whether to allow partial transfers of DB benefits to DC arrangements (subject to compliance with the new DB to DC transfer regime outlined above);
- check the triviality provisions in the scheme's rules to determine whether the scheme can provide:
- trivial commutation lump sums of up to £30,000 and small lump sums of up to £10,000; and
- trivial commutation lump sums and small lump sums at the member's minimum pension age (currently, this is typically age 55) rather than at age 60;
- consider what they are going to communicate to members; and
- monitor government policy on extending flexibilities to DB schemes.