Alison Bostock: I'm Alison Bostock, a professional trustee at PTL and I chair the seminar this morning looking at the issues around flexibility and choice for DB members.
I am joined now by Liz Gane, a director at Wragge Lawrence Graham and she talks about the legal issues on this topic.
So Liz, I think you started by talking about the rather tricky situation for trustees where they're being asked to make a transfer value to an arrangement that they're not wholly sure about.
Liz Gane: Yes that's right Alison.
So typically trustees faced with a difficult decision will come to us and ask, well how should we address this Liz, and I think my starting point is always for trustees to go back to absolute basics. So trustees need to look back on the principles laid down over hundreds of years of trust law cases and look to their general trust law duties in order to ascertain what direction they should take.
So I talked about some of the key trustee duties which govern this kind of situation, so in particular making sure that they act in accordance with the scheme documentation, making sure they act in accordance with the legislation, acting prudently, that is acting as though they are morally bound to provide for another person, and an interesting one, which is acting in the best interests of beneficiaries, and often trustees approach me and say well if we're acting in the best interests of beneficiaries then surely if we think that this transfer is "a dodgy transfer" then we should stop the member from making that transfer. And my response to that would be: acting in the best interests of beneficiaries does not necessarily mean that that's where you end up.
We've had a recent case, the Merchant Navy case, which has explained in a lot more detail what that duty means and that duty is a duty that is shaped by the legislation and the scheme rules. So the trustees first need to look at what their duties are under the scheme rules and the legislation and then act in a way that is consistent with those duties.
Alison: OK thanks Liz. And I think you also talked about the statutory right to transfer which I think we all know runs up to 12 months before normal pension age but you've had something to say about what normal pension age actually means cause it's changed recently, hasn't it?
Liz: Yes it has, so there's been a change to the legislation under the Pension Schemes Act. The right to take a transfer out as you say ends one year before normal pension age. Normal pension age itself is a statutory concept, so it's not necessarily the same as the normal retirement dates under a set of scheme rules.
Normal pension age used to mean the earliest age at which the member is entitled to receive his benefits on retirement from employment, and whilst that concept was never actually defined it was generally accepted that that meant the earliest age at which the member was entitled to receive all of their benefits under the scheme.
That definition has stayed in the Pension Schemes Act for certain concepts, but in terms of transfers out it's now changed so we've got a new definition. It's in section 100C for those that are interested, and the new definition says in relation to the category of benefits the earliest age at which the member becomes entitled to receive any of those benefits, so it used to be when can you receive all of your benefits, it's now when you receive any of your benefits.
Alison: So that's probably going to affect quite a lot of schemes isn't it, because a lot of them will have that situation when they equalised retirement ages but some benefits are due at 60 and others at 65.
Liz: Yeah absolutely, so for schemes in that situation or for members in that situation they might previously have been entitled to receive their age 65, their NRD 65 benefits only at the point when they hit 65 and because of that their normal pension age under the old definition would have been 65 because that's the age at which they could receive all of their benefits.
Under the new definition because they can receive the NRD 60 benefits at age 60, they're entitled to receive some of their benefits at age 60 and therefore their normal pension age under the new definition would be age 60.
Alison: OK so I think that is quite an interesting change. So you then moved on to talk about the other conditions that need to be met, assuming there is for example a statutory right and I think I was interested in the ones around leaving to transfer to an occupational scheme and what an occupational scheme had to look like.
Liz: Yeah absolutely. So as you say I mean there are various conditions that have to apply before you get that right to exercise your statutory right to transfer.
In terms of the need for the receiving scheme to be an occupational pension scheme, there's been a lot of court cases and Ombudsman determinations around this point. It's all around the definition of what is an occupational pension scheme, so the definition of an occupational pension scheme is one which is set up for people in service in employment of a description. And you might say well, you know, what on earth does that mean Liz.
Well employments of a description has been helpfully clarified by the Pensions Ombudsman in that the Pensions Ombudsman has said it should be possible to identify a closed list of employments to which the scheme relates, so any pension schemes where they say that the membership of the scheme is open to employees of XYZ Limited and the member who's looking to transfer is an employee of XYZ Limited or is a director of XYZ Limited then that's absolutely fine, the Ombudsman has said that's an occupational pension scheme.
The ones that are more difficult are ones where the description of who can join the scheme is an employee of XYZ Limited or an employee of any other company and what the Ombudsman has said in the determinations is that is not clear enough. Those schemes lack specificity, so they are not specific on who can join the scheme, and you cannot identify from that description who's eligible to join this scheme and on those Ombudsman determinations were all about members who were claiming against the transferring scheme to say you should have allowed me to transfer and you've blocked my transfer.
Well on all of those cases where the category of employment was not specific, the Ombudsman said no they've correctly blocked your transfer because this was not an occupational pension scheme.
Alison: OK so the onus on the trustees is to see whether they have the right or the duty to pay the transfer but they've also got to look at the receiving scheme and complete the picture?
Liz: Yes that's absolutely right, so this is all about due diligence for trustees, it's making sure that they obtain copies of the rules of the receiving scheme and they carry out the analysis of whether the member has a statutory right and indeed whether the rules of the receiving scheme are such that it is appropriate for that scheme to accept the transfer value.
Alison: That's great Liz, but obviously the member will generally have taken financial advice especially if the transfer value is £30,000 or more, how far do the trustees have to go in asking about whether that advice has been taken or indeed even looking at that advice?
Liz: Well they don't, I think is the short answer to that question, as in they don't have to see that advice, they don't have to check that that advice says that the member should transfer from the defined benefit scheme.
All the trustees are required to do is make sure that the member has taken advice from an appropriately authorised financial adviser and there are steps that they need to go through to confirm that that is the case. They have to get checklists filled in by the adviser and signed off and they want to check that the adviser is indeed properly registered with the Financial Services Authority. However, once they've been through those steps that the sum total of their duties.
Alison: And I think the other thing you mentioned was about the discharge wasn't it? If it's not a statutory transfer value, there's something extra to do to make sure that trustees get a proper discharge?
Liz: Yeah absolutely. So where there is a statutory transfer, trustees obtain a statutory discharge under the Pension Schemes Act. Where it's not a statutory transfer then trustees need to be really careful to make sure the member has signed off a robust discharge to the trustees, which will be drawn in similar terms of the discharge under the legislation, but it is a key piece of evidence for trustees.
Alison: OK thanks very much Liz.