Out-Law News 3 min. read

Defined benefit scheme trustees urged to prepare for more transfer requests ahead of new pension flexibilities


Trustees of defined benefit (DB) pension schemes should be ready for more requests from their members to transfer their savings into defined contribution (DC) schemes once new flexibilities come into force in April, the Pensions Regulator has said.

The regulator is consulting on new guidance to help trustees manage these requests, and to keep on top of the risks to their investment and funding policies that increased transfers out of their schemes could create. The draft guidance notes that trustees should conduct "proper due diligence" on schemes that their members wish to transfer into, but makes the point that trustees do not have a duty to block "inappropriate" transfers.

Stephen Soper, interim chief executive of the Pensions Regulator, said that it was "still highly likely in current conditions" that remaining in their current scheme would be in the best financial interests of most DB scheme members. However, the personal circumstances of some members could mean that they wished to consider their options, he said.

"The provision of clear, timely information from trustees and the use of independent regulated financial advice will enable members to make informed decisions that suit their personal aims and circumstances," he said. "We will be working closely with the FCA as the advice regime develops, and producing advice for trustees considering member requests at all points in their journey, for example decumulation options, to ensure those decisions are also well-informed."

From April 2015, members of DC pension schemes will be able to access their savings in any way that they wish once they turn 55, without facing heavy tax penalties or necessarily having to buy an annuity. This new freedom will be backed by a right to guaranteed free and impartial guidance at the point of retirement. Guidance provided through this 'Pension Wise' service will be tailored and personalised, but will not recommend specific steps, products or providers in the same way as regulated financial advice.

Members of private sector and funded public sector DB schemes will be allowed to transfer pensions not yet in payment to DC schemes in order to take advantage of the new freedoms. However, members with "safeguarded" pension benefits of £30,000 or more will need to take "appropriate" independent financial advice from a regulated financial adviser before they can do this.

According to the draft guidance, scheme trustees will be required to check that the member has obtained the necessary advice. They will also be required to check that the adviser is registered with the FCA. However, they will not be required to check what advice was given or whether the adviser has recommended the transfer. Scheme members will be expected to meet the cost of the advice, unless the transfer has been initiated by the employer.

The draft guidance states that it is not the role of the trustee to "second-guess the member's individual circumstances" or "prevent a member from making decisions which the trustees might consider to be inappropriate". However, the guidance comments that trustees are expected to conduct "proper due diligence" to ensure that the receiving scheme is a "legitimate" arrangement, and to "consider carefully whether the transfer should be made" if they have reason to believe that this is not the case.

"One remaining challenge is how trustees should handle transfer requests to schemes that look like pension scams," said pensions expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com. "The regulator's draft guidance doesn't go into any detail on this, not surprisingly because of the problem posed by the recent Pensions Ombudsman decisions. There must be a concern about a second wave of pension scams from April, and trustees and administrators do need to be vigilant."

"There are still some important gaps: for example, we will need to wait for details of how administrators should build the 'second line of defence' into their processes. The key point for now is for trustees to make sure their administrators have the right processes in place, and to update their communications and transfer forms. It's essential to get the discharge wording in these forms right," he said.

The regulator will publish further guidance for trustees in early March, covering issues such as how trustees should direct their members to the new Pension Wise service, following the publication of further regulations by the Department for Work and Pensions (DWP). The consultation period for this guidance ends on 17 March.

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