From 6 April 2015, new guidance will apply to transfer value requests from Defined Benefit (DB) to Defined Contribution (DC) schemes. Trustees will need to be familiar with the requirements and timescales.
Transfer value requests from Defined Benefit (DB) to Defined Contribution (DC) schemes received after 6 April 2015, will need to comply with new guidance (currently under consultation) from the Regulator. With an increase in requests for transfers expected, trustees should be familiar with the requirements and timescales to ensure that these are met for all members.
The Pensions Regulator’s basic position is that remaining within a DB scheme is generally and likely to be in the best financial interests of the majority of people as opposed to transferring to a money purchase scheme. There was initially a proposal to prevent transfers from DB to DC schemes when the new flexibilities for DC schemes were being considered, but these continue to be permitted for funded public and private sector DB schemes.
However, when defining the role of the trustee in relation to transfers the Regulator makes clear that it is not part of their role to “second guess the member’s individual circumstances”, nor should they seek to prevent members from making decisions that they might consider inappropriate in such circumstances. They should though provide support to members in making informed decisions by signposting appropriate guidance and advice.
Trustees must have adequate systems and processes in place for dealing with transfer requests, especially as these are expected to increase and will require efficient management which also ensures that the legislative and regulatory requirements are being observed.
When a member makes a request for a transfer, the draft guidance notes that certain steps and timescales must be followed:
- Within one month, the member must be advised of the requirement to take independent advice (not required if the member has safeguarded (i.e. DB) benefits of less than £30,000);
- Within three months, a statement of entitlement must be provided to the member including a transfer value quotation at the guarantee date;
- Within 10 days of the guarantee date, the statement of entitlement must be provided setting out details of all benefits held and noting that the member will require to provide confirmation that they have received independent advice before their transfer can be processed;
- A further confirmation is required from the member, in writing, and within three months of the guarantee date confirming that they wish to go ahead with the transfer and providing information to verify that they have received independent advice from an FCA authorised adviser;
- The receiving scheme must be willing to accept the transfer;
- The trustees must check that the member has received financial advice as required; and
- The transfer value must then be transferred within six months of the guarantee date, which time limit will only apply where it has been possible for the trustees to check that the member has received advice as required.
The basis for calculation of transfer values is not altered by guidance, nor is the fact that members less than one year from normal retirement date do not have a statutory right to a transfer value, although the scheme may confer a right on the trustees to permit transfers for such members.
The draft guidance reminds trustees to be conscious of scheme funding and the transfer value assumptions in place, whilst keeping in mind the impact on scheme funding that an increase in transfers could have. The overall duty is to ensure that responsibilities to the transferring member, and those remaining in the scheme, are balanced and neither group is favoured either intentionally or unintentionally.
Due diligence on the receiving scheme remains highly important. Trustees should ensure they have satisfied themselves, as far as possible, that the receiving scheme is capable of meeting the statutory requirements for a transfer, and that the Regulators guidance on ensuring schemes are not potentially being used for the purposes of pensions liberation is adhered to.
If you have any questions or would like more information, please contact one of our specialists below.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.