Trustees of final salary pension schemes must not seek to stand in the way of members giving up guaranteed benefits to take advantage of pension freedoms, the Pensions Regulator has warned, as it cited the potential for a spate of transfer requests when new rules come into force in April.
The regulator today (13 February) published a consultation paper offering guidance to defined benefit trustees on how to deal with member transfer requests.
It is estimated that there are 6,070 DB schemes in the UK, comprising 11.1m members, and with assets of around £1,000bn. Recent data published by Hargreaves Lansdown showed that more than half a million savers could be set to give up their guaranteed benefits by transferring out.
The regulator admits the new flexibilities set to come in from April will “have the potential” to see increased requests from members to transfer to a DC scheme, therefore trustees will be under more pressure to supply information about the value of their benefits.
The paper also echoes industry concerns that trustees should be aware that an increase in the volume of transfers “could also have an impact on both the funding and investment policy of DB schemes”.
Crucially, the regulator follows guidance issued by the Pensions Ombudsman and emphasises the right of a member to transfer, meaning it is unlikely a spate of requests and broader effects on the scheme will be adequate reason to attempt to block requests.
Nor should they prevent a member from making decisions which the trustees might consider to be “inappropriate”, which could refer to transfers for example to high risk esoteric investment schemes.
It will, though, be trustees’ role to conduct “proper due diligence” on the receiving scheme to ensure it is a legitimate arrangement. It continues that “where trustees have reason to believe that the receiving scheme is not... they should consider carefully whether the transfer should be made”.
It was previously suggested that trustees could provider DB to DC transfer advice to help prevent poor decisions. The regulator says in the paper it is not the trustee’s role to second guess a “choice to transfer safeguarded benefits”.
They should, however, ensure “independent advice” has been taken has been taken where combined pension funds total more than £30,000, which could place a heavy burden in terms of checking those with multiple pots.
The paper states that where a member requests a transfer, the trustee must respond must ensure within one month that a member has been notified of the requirement to take “independent advice” and must respond with the member’s entitlement within three months of the request date.
The regulator reiterates that it cannot waive a trustee’s legal duty to carry out a transfer within the six-month statutory deadline and it expects the majority of requests to be completed in this period. Trustees can request an extension if the scheme is being wound up and the interests of members generally would be prejudiced by the transfer.
Stephen Soper, TPR’s interim chief executive, added that for most members it is still “highly likely” to be in their best interests to remain in a DB scheme.
“However members’ personal circumstances may mean they wish to consider the other options open to them.
“The provision of clear, timely information from trustees and the use of independent regulated financial advice will enable members to make informed decisions that suit their personal aims and circumstances.
“We will be working closely with the FCA as the advice regime develops, and producing guidance for trustees considering member requests at all points in their journey, for example decumulation options, to ensure those decisions are also well informed.”
donia.o’loughlin@ft.com
