The Department for Work and Pensions (DWP) has called for evidence on the bulk transfer of DC pensions without member consent.
The DWP is asking for industry views on how the current provisions work in practice and is also seeking suggestions on how the DC to DC transfer process could be improved. The deadline for responding to the call for evidence is 21 February 2017.
- 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 recently entered the industry.
- The Department for Work and Pensions (DWP) has realised the existing bulk transfer provisions can act as a potential barrier to consolidation in the DC landscape.
- The DWP has therefore called for evidence on the bulk transfer of DC benefits without member consent. The call for evidence, which includes details for responding, is available here: The DWP consultation on bulk DC transfers
- The deadline for responding is 21 February 2017.
- The DWP expects to have further industry engagement and consultation later this year with any necessary secondary legislation following by April 2018.
What's covered by the call for evidence?
The DWP is asking for industry views on how the current provisions work in practice given that they were designed with DB transfers in mind. It is also seeking suggestions on how the DC to DC transfer process could be improved. The DWP wants to ensure that unnecessary burdens on DC schemes are reduced while ensuring members are adequately protected.
Bulk transfers from DC schemes without member consent are the focus of the call for evidence. In our experience, these would usually be initiated by the scheme employer. This would include situations where an employer wants to:
- consolidate pension assets from two or more schemes into one scheme; or
- exit pension provision and transfer members into a master trust, for example.
Following the introduction of the pensions flexibilities in 2015, more employers are considering how to provide members with access to the wider range of benefits such as drawdown or cash (in many cases without having to provide them through their own schemes).
One of the barriers we see employers coming up against is in the implementation of DC bulk transfers without consent, particularly where:
- members have HMRC protections; or
- there are difficulties in obtaining actuarial certification in relation to the transfer.
There are no plans to create an overriding statutory power for trustees to make bulk transfers without consent. Therefore, trustees will still need to consider whether they are permitted to do so by their scheme Rules, and if not, whether it is possible to amend the scheme Rules to permit them.
What's not covered by the call for evidence
Certain areas some of which, in our experience, often prevent DC to DC transfers being implemented successfully are excluded from the call for evidence.
- tax protections: 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. The DWP has excluded this issue because it is not responsible for HMRC legislation.
- buy-outs: where an occupational scheme wishes to secure DC benefits with an insurer, instead of bulk transferring them to a separate occupational scheme, a different statutory provision applies and this is not covered by the call for evidence.
- transfers between master trusts: where the transferring master trust has experienced a "trigger event" and is transferring members to another master trust before being wound up. This is excluded because the DWP says the Pension Schemes Bill 2016/17 deals with "forced" transfers in this situation
- DB bulk transfers.
Existing regime - what DC to DC transfers are already possible?
The current legislation allows bulk transfers between occupational pension schemes without member consent if certain conditions are met. These conditions are that:
- the transfer is between schemes which relate (a) to the same employer, (b) to different employers within the same group, or (c) to different employers where the transfer occurs as a result of a financial transaction between the employers (the "scheme relationship condition"); and
- the actuary certifies the transfer results in a member having broadly no less favourable rights in the receiving scheme (the "scheme quality condition").
Why does the existing regime need changing?
Actuarial difficulties - the scheme quality condition
- As the DWP acknowledges, this test was intended to ensure that members of DB schemes who were the subject of a transfer without consent secured a broadly similar or enhanced entitlement in the receiving scheme.
- There is no definition in the legislation of "broadly no less favourable" and there is no detailed guidance for actuaries as to what they should take into account in providing a certificate for a DC bulk transfer. For example, should they take into account charges, the range of investment options, retirement options available to members, governance standards, the level of services provided to members and the security of member benefits?
- The DWP has asked for views on whether this test remains appropriate for DC transfers and if not, what the alternative would be. Possible suggestions range from providing technical guidance for trustees to requiring another professionally qualified person (other than an actuary) to provide the advice/certification.
- It may be that we end up with a condition that retains an element of "broad equivalence" to allow factors such as those set out above to be taken into account but moves away from requiring the actuary to give this certification.
The scheme relationship condition - less problematic?
- In practice, in a DC to DC transfer the scheme relationship condition is usually less of an issue.
- However, the DWP has identified areas where this condition could cause problems:
- it could act as a barrier to the efficient consolidation of small pots in occupational pension schemes. The DWP is asking for views on whether or not the industry sees this as a barrier or if there are ways it has been overcome.
- it prevents bulk transfers ever happening from orphaned schemes (i.e. schemes where the only employer has been dissolved and where there is no trustee). The DWP is considering whether it would be helpful to allow for an exemption from the scheme relationship condition to allow members to be transferred to a well-governed scheme and the orphaned scheme to be wound-up.
Bulk transfers from stakeholder schemes
Stakeholder schemes may still be in operation and the employer may wish to bulk transfer members out without consent to a master trust, occupational or personal pension scheme. For stakeholder schemes, there is an alternative route which allows bulk transfers without consent to be made without requiring the scheme quality condition or scheme relationship condition to be met. However, this alternative route only permits transfers to another stakeholder scheme, and only where the current arrangement is in wind-up.
The DWP is considering whether to relax these conditions, on the grounds that they are now arguably outdated.
What happens next?
This opportunity to shape DWP policy is welcome, as the current restrictions can often prevent employers from restructuring their schemes in the way they want. We will be submitting a response to the DWP's call for evidence based on our observations in practice and the issues our clients have faced in trying to implement DC to DC transfers without consent.
The deadline for consultation responses is 21 February 2017. If you have any issues you would like us to include in our response, please do contact Joanne or Christopher by 17 February 2017.