The Joy of Transfers

With the much discussed flexibilities being offered to Defined Contribution (DC) members from April 2015, there is no doubt that Defined Benefit (DB) members may be feeling a bit left out of the party.  There is an expectation in the industry that a reasonable number of DB members will be wishing to take advantage of the DC flexibilities as well.

The good news is that DB members will be able to transfer to DC arrangements to take advantage of the DC flexibilities.  However, the not so good news is that the transfer process will not be as simple as members may wish.

Firstly there is the new “advice” requirement for DB members who have pension pots in excess of £30,000.  Members must take and Trustees must check “appropriate independent advice” has been obtained by the member from an “authorised, independent adviser”. The member must pay for this advice.  From a Trustee’s perspective, it is concerning to note that DB members with pension pots below £30,000 do not need to take any level of advice in order to transfer.  Given many DB schemes are reducing (and in some cases, significantly reducing) transfer values to reflect underfunding, it is essential that all DB members fully understand the impact of transferring their pension pots, whatever the size of that pot.  Trustees may therefore want to ensure that the communication sent to members who have expressed an interest in transferring is reviewed and updated to check that members fully understand the value of the benefits they are giving up.

Then there is the question of whether the DB member actually has a right to a statutory transfer value.  If the member is less than one year from normal retirement age then in fact he is not entitled to a statutory transfer value and Trustees will need to consider whether they wish to allow transfer values for these members.  Trustees will not receive a statutory discharge if they allow the transfer value and therefore may not wish to subject themselves to this level of risk. However, this stance seems to be at odds with the flexibility being afforded to the other DB members in the scheme, and to DC members in general. Therefore perhaps Trustees should be looking at Rule amendments. Furthermore, if Trustees decide to adopt the permissive statutory override for transfer values in their Scheme Rules they may wish to consider flagging to members the availability of a transfer value as one of the retirement options.  Otherwise Trustees may leave themselves open to challenge.

Given there is likely to be an increased number of transfer out requests from DB members from April 2015, Trustees should be acting now.  Scheme Rules should be reviewed and legal advice taken if required. Member communication wording should be checked and if necessary actuarial advice may also be required to confirm that the transfer value calculation basis remains appropriate.