The Pensions Regulator has recently published guidance on Defined Benefit (DB) to Defined Contribution (DC) transfers and conversions. The guidance is aimed at addressing statutory transfers of DB benefits but also applies to transfers made under a scheme’s rules (and partial transfers where the scheme rules permit this) as well as to conversions of benefits within the same scheme.
This guidance, which can be found on the Pensions Regulator’s website, gives trustees a lot to think about, and to act upon!
The greater flexibility now being offered to members of DC schemes to access their pensions savings has the potential to increase the number of members of DB schemes requesting a transfer of their benefits.
Trustees will need to take appropriate advice and ensure that they have processes in place to implement appropriate transfer requests in a timely manner, whilst ensuring that member benefits are protected and pensions liberation fraud does not occur. This will entail liaising with the scheme administrators to ensure they have processes in place to deal with the increased transfer requests, and have amended their scheme communications to meet the new legislative requirements. The Pension Schemes Act 2015 has also introduced a requirement for Trustees to check that a member has obtained the appropriate independent financial advice before transferring their DB benefit to a DC scheme (or to a DC section of the same scheme). They must do this by verifying the adviser’s confirmation meets the legislative requirements. Trustees may wish to make members aware of the FCAS’ consumer pages at www.fca.org.uk/consumers.
It will be important for trustees to understand the demand from members for transfers and the subsequent impact those transfers could have on scheme funding, including the effect of those members with a large transfer value relative to the Scheme. This will involve taking advice from the scheme actuary on the transfer value basis and insufficiency report (if necessary). Trustees also need to be mindful of the notifiable event which can occur if a transfer value of greater than 5% of scheme assets.
The potential impact on investments also needs to be monitored particularly regarding the balance of asset classes held by the scheme and the liquidity required to pay a large number of transfer values or in respect of members with large transfer values relative to the scheme asset size.
Trustees will also need to review their own scheme rules and if necessary take legal advice. The circumstances under which transfers from the scheme are permitted will be set out in the rules. Members have a statutory right to transfer their benefits from a DB Scheme up to one year before the scheme’s normal retirement date. Trustees may wish to extend the transfer window under the rules up to the normal retirement date to afford all members the same flexibility for transferring but at the same time need to understand the demands on the scheme’s liquidity and investment strategy, the employer appetite and the administrative practicality of doing so.
If members have DC benefits in the scheme then they will be able to transfer them from the scheme up until benefit crystallisation date. Alternatively some members may request to convert their DB benefits to DC benefits within the same scheme. There is no statutory obligation for schemes to permit this and the exact method of conversion or internal transfer will depend on the scheme’s trust deed and rules. It is up to the trustees and employers to determine which options to offer and to amend their rules accordingly.
We would recommend that trustees take advice on all of these issues as soon as possible.