From April 2018, it will be possible to bulk transfer pure defined contribution (DC) rights without member consent to an authorised master trust or to another DC occupational scheme on the advice of an appropriate independent adviser, as well as to DC schemes controlled by connected employers.
The Government has published details of the new regime. Finalised regulations now provide welcome clarity for trustees on the way forward.
Key action points for trustees
1. Transfers on the advice of an independent appropriate adviser
Bulk transfers to a DC occupational pension scheme will be possible without member consent, provided the advice of an independent appropriate adviser has been obtained and considered.
2. Transfers to a master trust
Transfers to a master trust authorised under the Pension Schemes Act 2017 will be automatically allowed without the need for an independent appropriate adviser's report.
3. Transfers between "connected" schemes
Transfers between schemes whose sponsoring employers are connected will also be allowed without the need for an independent appropriate adviser's report.
4. Charge cap constraints
Where members benefit from the statutory charge cap in the transferring scheme, charge cap protection must be in place in the receiving scheme.
The Government called for evidence in October 2017 on the current system of making transfers without consent between DC pension schemes. That system impeded legitimate activity as the conditions for transfer were not designed with DC schemes in mind.
Our article explained the Government's initial proposals. Industry concerns have largely been addressed in the new regime.
The solution from 6 April 2018
The process of bulk transferring pure money purchase rights without the need for trustees to obtain members' consent is simplified. However, these rights must not include any guarantee or promise in relation to the amount of benefits to be provided or the amount available for the provision of the benefits. This means that money purchase benefits offering a guaranteed annuity rate or guaranteed investment return are outside the scope of the new regime and the existing routes for a bulk transfer without member consent (e.g. obtaining an actuarial certificate or satisfying the scheme relationship test) will continue to apply.
Transfers to authorised master trusts
A bulk transfer to a trust authorised under the Pension Schemes Act 2017, typically a master trust, will be automatically allowed. Advice from an independent appropriate adviser will not be required in this instance which will remove a barrier for several trustees/employers who wish to implement such transfers. However, trustees will still need to consider whether the transfer is consistent with their fiduciary duties in the usual way.
As a matter of practice, this mechanism is likely to become more useful when master trusts are fully authorised under the new authorisation regime expected to be in place by October 2018.
Transfers on the advice of an independent appropriate adviser
A bulk transfer to a receiving scheme will be possible without member consent provided the trustees of the transferring scheme first obtain and consider written advice in relation to the transfer from an appropriate adviser.
Who is an appropriate adviser?
This is a person whom the trustees reasonably believe to be qualified to give the advice by reason of that person's ability in, and practical experience and knowledge of, pension scheme management.
The Government has helpfully moved away from a requirement that this adviser must be "suitably qualified" in "financial" and "investment" matters (which was the requirement in the original draft regulations). The broader wording in the final regulations allows trustees more latitude in their choice of appointed adviser.
The advice must be received and considered "within the year ending with the date of transfer." A date-check will be necessary to ensure compliance.
The appropriate advisor must also be independent of the receiving scheme. This requires trustees to consider whether during the year ending on the date the advice was provided the proposed adviser received payment for services from the receiving scheme. For this purpose, "services" means advisory, administration or investment services.
The independence requirement is wide ranging and also extends to indirect payments, for example, in relation to payments received from the receiving scheme's employer (or a group undertaking).
Trustees will need to ensure that due diligence is carried out in relation to the proposed adviser, in relation to their experience and knowledge of pension scheme management and also their independence. If an adviser received a very small payment which resulted in the independent tests not being completely satisfied, the Government considers trustees still have the ability to use that adviser, although trustees should give these matters "careful consideration and weight".
The Government intends to produce high level guidance for trustees by the end of April, particularly around choosing an adviser and the aspects of the receiving scheme that should be taken into account when making the decision to transfer.
Bulk transfers between connected schemes
Bulk transfers without member consent can also be carried out without the need for advice from an independent appropriate adviser where there is a sufficiently close group relationship between the employers of the members being transferred and they are in controlling positions within their respective schemes. Independent advice will not have to be obtained where:
- the principal employer or controlling employer of the transferring scheme is a group undertaking in relation to the principal employer or controlling employer of the receiving scheme and
- the members whose rights are to be transferred are current or former employees of an undertaking which is a group undertaking in relation to the principal or controlling employer of the transferring or receiving scheme.
Charge cap constraints
The restrictions on charges imposed on members continue to apply where members' rights are transferred without their consent to a receiving scheme (or from one arrangement to another within a scheme). However restrictions on charges won't apply to members transferring from a non-default arrangement to another non-default arrangement, where the member selected an arrangement within the five years before the transfer.
Transfers under old regime must be completed by 30 September 2019
From 1 October 2019 it will no longer be possible to bulk transfer pure DC rights using the actuarial certificate process under the existing regulations. Until then, there is a transitional period which enables scheme to carry out DC bulk transfers using either regime.
Good to go?
The new mechanisms permissible from April 2018 are welcome. Trustees will, though, have to be mindful of their fiduciary duties when considering a bulk transfer under this route in addition to ensuring any required advice is obtained. This should, in most normal circumstances, be manageable.
Unfortunately there are still some areas where despite the new routes, bulk transfers remain problematic. These are typically in relation to members with A Day tax protections (being able to take benefits from age 50 rather than 55 and/or a tax-free lump sum above the current 25% limit). Trustees should ensure they understand the implications before engaging in a transfer exercise which relates to members with such protections.
That said, for plain vanilla cases, it is pleasing that the Government has found a workable solution.