Automatic enrolment, ever-increasing governance requirements and the introduction of new benefit freedoms have all led employers to consider the future of their occupational DC pension schemes.
Automatic enrolment, ever-increasing governance requirements and the introduction of new benefit freedoms have all led employers to consider the future of their occupational DC pension schemes. In particular, many employers and trustees are considering consolidation of their existing schemes and/or the transfer of benefits to the 'master trusts' that have now entered the industry.
The Government has recognised concerns that the existing bulk transfer regulations can act as a barrier to consolidation of DC benefits and is consulting on new draft legislation which will relax the current conditions for bulk transfers of DC benefits without member consent.
Transfers to a regulated master or DC trust
It is proposed that transfers to a regulated master trust or to any receiving DC arrangement, where the trustees consider the advice of a "suitably qualified" independent professional, will be possible in both cases, provided this is compliant with trustees' fiduciary obligations.
The changes will be welcomed by many in the pensions industry, although they do not address impediments in the tax legislation that affect some transfers. Trustees will of course still need to consider whether to go ahead with such transfers using the usual fiduciary decision-making approach.
The consultation runs until 30 November 2017. Subject to the outcome, the changes will become law in April 2018. If you have any comments you would like us to include as part of our response, please let us know by Friday 24 November 2017.
We flagged in February that the Government was calling for evidence on the current system for making transfers without consent between defined contribution (DC) pension schemes.
Our analysis explained that the current system impedes legitimate activity because the conditions were not designed with DC schemes in mind and do not naturally fit with the requirements of DC schemes.
How does the Government plan to address it?
The Government now plans to simplify the statutory conditions that need to be met for a bulk transfer between DC schemes without member consent.
In particular, the Government plans to remove the need for the two aspects flagged in our previous analysis, namely the actuarial certification required to demonstrate the "scheme quality condition", and the "scheme relationship condition".
These changes only affect bulk transfers between pure DC schemes. If any sort of defined benefit (DB) is involved, the current regime will continue to apply. Some benefit structures sit on the margin between DB and DC, e.g. DC schemes with guaranteed annuity rates should not be regarded as DC for this purpose.
The proposed new legislation
The Government proposes to add two further routes to the regulations on bulk transfers without consent. These routes are only available to transfers of DC benefits. Schemes that can satisfy either of these routes do not need to satisfy any other conditions in the regulations.
The first route is simply that the receiving arrangement is a regulated master trust (under the new legislation, when it comes into force, which will require master trust providers to be authorised). Transfers of DC benefits to such arrangements will be automatically permitted with no further statutory conditions applying.
The second route can be used if the following conditions are all satisfied:
- the transferring scheme trustees have obtained and considered written advice from a "suitably qualified professional";
- the "suitably qualified professional" is a person who is reasonably believed by the trustees to be qualified by ability in, and practical experience of, financial matters, and to have the appropriate knowledge and experience of the management of the investments of schemes such as the transferring and receiving schemes; and
- the "suitably qualified professional" is independent of the receiving scheme.
To judge whether the professional is "independent" of the receiving scheme, the trustees of the transferring scheme will need to take into account whether he has been a director/partner/employee of any service provider to the receiving scheme, or any undertaking which is connected to such a service provider and whether he receives any payment or other benefit from a service provider.
The Government also intends to ensure that if a member has the protection of the charges cap (which applies to limit charges on certain default DC arrangements), that protection should survive the transfer.
Whichever route is adopted, trustees will still of course need to satisfy themselves that making the transfer is consistent with their fiduciary duties. In other words, they will still need to take into consideration all relevant factors, i.e. charges, investment choices, at-retirement options, member communications, etc.
Will this solve all the problems?
No. In particular, some members have the benefit of HMRC protections designed to ensure that they do not lose the more favourable rights they had under the pre-2006 tax regime (for example, a right to take benefits at age 50 rather than 55 and/or a tax-free lump sum above the current 25% limit). There are separate requirements that must be met to avoid members losing these protections on a bulk transfer, which often cause problems in practice. This is acknowledged by the DWP, but still not addressed (as it is a matter for HMRC).
What happens next?
The draft regulations are open to consultation until 30 November 2017. Subject to the outcome of the consultation process, the new regulations will become law in April 2018.
We will consider the details of the new regulations and respond to the consultation, as will the industry bodies in which we participate. Please let Joanne or Christopher know if you have any comments you would like us to include in our response.
The headline comment, however, is that it is pleasing that the Government has recognised the concerns of the pensions industry in this area, and from April 2018 it appears likely that the difficulties DC schemes currently face should be addressed.