The Regulator is consulting on new transfer guidance for DB scheme trustees. It is based on the requirement in the Pension Schemes Bill that trustees may not generally make a transfer payment from a DB scheme where the member intends acquiring money purchase or cash balance benefits, unless the member has first taken independent financial advice. The only exception is that IFA advice is not necessary where the cash equivalent transfer value (CETV) is £30,000 or less. The primary legislation is not yet finalised and draft regulations with more detail of the requirements are yet to be published, but as the new requirements will come into force on 6 April 2015 to tie up with the Budget 2014 flexibilities, trustees need to be reviewing their communication and transfer materials as soon as possible.

The starting point is that the Regulator believes "it is likely to be in the best financial interests of the majority of members to remain in their DB scheme". Of course this generalisation will have exceptions in practice.

Some key points arising from the draft guidance:

  • Trustees should have processes in place to implement transfer requests in a timely manner (and be ready for an increase in volume from April).
  • It is not the trustees' role to second guess the member or prevent him from making a decision which the trustees might consider inappropriate.
  • Trustees should be aware of the impact transfers could have on scheme funding and investments (in particular, cash requirements).
  • Trustees should conduct due diligence on the receiving scheme to ensure it is a legitimate arrangement (this ties up with the checks trustees should be making in relation to pension liberation).
  • Relevant information in the scheme booklet should be reviewed and updated.

Specifically in relation to the requirement for independent financial advice:

  • Trustees must check the member has taken FCA authorised advice "on the merits of the transfer" (unless the CETV is £30,000 or less).
  • Trustees are not responsible for checking what advice was given, what the recommendation was or whether the member is following it.
  • The adviser must provide the member with a signed note including standard information required by the FCA confirming appropriate advice has been taken. The member should then pass this to the trustees.
  • Trustees must check the adviser is on the FCA register and keep a record of this check.
  • The member should be warned that "their transfer is at risk if confirmation is not received within three months of the guarantee date" and where trustees have not been able to confirm that advice has been taken then they do not have to proceed with the transfer request.

In relation to assumptions and scheme funding:

  • Trustees should consider the impact on scheme funding that the number and size of transfer requests could have – is there a material risk to their funding assumptions as a result of their approach to transfers?
  • Trustees should identify any particular class of transferring member that could disproportionately affect scheme funding. For example members with a shorter life expectancy might want to "cash-out" their benefits leaving behind the members who are likely to live longest.
  • Trustees could consider requesting an insufficiency report (potentially leading to reduction of CETVs).

Trustees should therefore be talking to their actuaries now on whether the existing CETV transfer basis is appropriate and whether they ought to consider putting in place an insufficiency report. It may be that trustees decide to wait and see the actual transfer experience from April before making any changes, but they should at least be thinking about the issues now.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.