The Pensions Regulator has recently issued its regulatory guidance on DB-to-DC transfers, following a consultation exercise earlier in the year. The guidance sets down important principles for trustees of DB schemes, in light of the additional flexibilities now available to DC scheme members and the anticipated consequential upsurge in DB-to-DC transfer requests.
Types of benefit, and the advice requirement
The advice requirement, namely that the member must obtain appropriate independent advice, applies whenever a member wishes to acquire "flexible benefits" (broadly, money purchase or cash balance benefits) by the transfer from a scheme, or the conversion within a scheme, of "safeguarded benefits" (being essentially any benefits that are not flexible).
The only exception (known as the "£30,000 exemption") applies where a member's unreduced Cash Equivalent Transfer Value is £30,000 or below: in such a case, no such advice requirement applies.
Categories of benefit
A member's statutory right to a CETV now applies within a scheme on a category-by-category basis, whatever the scheme's rules might say. It will not be possible for trustees to insist that members transfer all of their benefits from a scheme: they are entitled (provided they are seeking a statutory transfer) simply to transfer, say, their non- money purchase flexible benefits, but leave everything else behind.
Trustees' role
TPR's guidance makes very clear what the trustees' role is in relation to transfer requests:
Trustees should ensure they have processes in place to implement transfer requests in a timely manner. They should maintain accurate and complete records of requests received and the transfers that have been made...
It is not the trustees' role to second-guess the member's individual circumstances. It is also not their role to prevent a member from making decisions which the trustees might consider to be inappropriate. Their role is to check that the appropriate advice has been obtained by verifying that the adviser's confirmation meets legislative requirements...
The £30,000 exemption
Even if this applies, TPR still expects trustees to remind the member about the information on transfers that is available from itself, from the Pensions Advisory Service, and from the FCA. Trustees must also recommend to the member that they seek independent financial advice about the transfer, even though there is ultimately no requirement to take it.
Trustee obligations regarding advice
Trustees are required to check that appropriate independent advice has been received by a member before his or her transfer, or conversion, is effected. They are not, however, responsible for checking what advice was given; what recommendation was made; or whether the member is following it.
They must however satisfy themselves that the adviser has the requisite level of authorisations to advise on the transfer of "safeguarded benefits", both by receiving and reviewing the adviser's own confirmation and then themselves checking and verifying the Financial Services Register that is maintained by the FCA.
Fraudulent activity
The guidance goes on to remind trustees to be ever-vigilant about the risk of fraudulent applications being submitted to a scheme, in particular if there are a large number of written transfer confirmations received from the same firm in a short space of time, or if they have other reason to doubt the authenticity of the confirmations being provided.
Who pays for the advice?
TPR expects members to pay for the advice they receive, except where a transfer is "employer-instigated". In the latter case, an employer may properly make it a condition of paying for such advice that the member uses an adviser of its (the employer's) own choosing. Routine communications to members explaining their options should not, the Guidance says, trigger the requirement for an employer to pay for advice. However trustees should avoid placing too much emphasis on one or more particular options, and should ensure that their material is "fair, clear, unbiased and straightforward".
Conclusions
The guidance is a useful summary of the existing legislative regime and the new elements that have been added to it, and how collectively these obligations should be interpreted in the context of the flexible world in which we now live. It is actually quite a good read (everything is of course relative!) and will undoubtedly become a regular part of a DB trustee's working library.
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.
