Personal PensionApr 27 2015

DB schemes – don’t stop me now

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DB schemes – don’t stop me now

Breathing the airs of freedom, as all retirement savers now are post-6 April, clients with old final salary or other defined benefit (DB) pensions are becoming heady with the thought that they may be able to get their hands on handsome pots of cash liberated from these antiquated regimes.

But can they really – and should they? These are questions that advisers, regulators and trustees are grappling with. To help clarify the matter the Pensions Regulator has just issued new guidelines; in a spirit of both liberty and prudence, the Regulator has decided to tread a fine line making it clear that while in most cases it will still not be in their interests to do so, no one can stop them.

The trustees of any DB scheme are obliged to provide a quote of the cash value of their benefits (known as a cash equivalent transfer value or CETV). Also known as a ‘statement of entitlement’ which can be requested once a year, this quote should be no less generous than the scheme’s best estimate of the value of these benefits, although schemes with significant deficits can reduce transfer values if they can demonstrate assets are ‘insufficient’.

Detailed guidelines about all of this are set down by the Pensions Regulator. Anyone with benefits worth less than £30,000 can request a transfer without the need for formal advice. Everyone else has to take advice from a qualified, regulated pensions transfer specialist with the appropriate qualifications.

Deadlines

One month – Trustees have one month to provide information on how to apply for a statement of entitlement when requested by a member

Three months – Trustees have three months to set a ‘guarantee date’ when an application has been received

10 days – Trustees have 10 days from the guarantee date to provide the statement.

3 months – Members have three months from receiving the statement to confirm that advice has been taken and apply for the transfer, naming the recipient scheme

6 months – The transfer must be completed within six months of the guarantee date

Source: The Pensions Regulator. Copyright: Money Management.

Checked and on the list

The trustees are obliged to check that the adviser is listed on the FCA’s website as having permission to advise on pension transfers. They have to see a letter from the adviser confirming that advice on the transfer has been provided to the client. They have to check that the scheme receiving the funds is legitimate and willing to receive it. And that is it.

With this done, the client has a statutory right to leave. No-one can stop them – even if the advice they have received is negative.

The regulator is quite clear about this in its guidance issued in April 2015 to coincide with the new tax rules: “Requiring members to obtain appropriate independent advice does not make trustees responsible for checking what advice was given, what recommendation was made or to confirm whether the member is following that recommendation.” And this remains the case even if the transfer is detrimental to the scheme – such as a large transfer from a relatively small scheme.

The trustees are expected to work out what to do as a result of such a transfer – and they have to report any transfer larger than £1.5m – but they cannot prevent it. So while the official line remains that “we believe it is likely to be in the best financial interests of the majority of members to remain in their DB scheme” the ethos is clear: it is up to the consumer to make their own decisions.

Requiring members to obtain appropriate independent advice does not make trustees responsible for checking what advice was given

Transfer window

Anecdotally, trustees of pension schemes had been receiving far more requests for transfer values than normal on the run up to the April rule changes, although there is little evidence yet that this has translated into actual transfers. This may be simply due to the timetables involved. It may be that members who receive negative recommendations have been put off.

But for clients who are insistent that they want their money now another problem is likely to emerge – finding a Sipp or personal pension provider willing to receive it. Many of the leading Sipp providers are refusing to accept DB to DC transfers without a positive recommendation, presumably due to fears over future legal comeback despite the flexibility of the current laws.

But there will always be some schemes willing to accept such transfers and there is no reason in law why they shouldn’t. Advisers are unlikely to want to help someone who has been recommended not to move from a DB scheme, particularly if they were responsible for the negative recommendation in the first place. The risk of civil, if not criminal, repercussions would be high. But again, there will always be advisers willing to take on such work.

Requirements of trustees

The trustees are required to check that appropriate independent advice has been received by the member before they carry out the transfer or conversion. For this purpose, the adviser is required to provide confirmation in writing to the member, which includes the following information

* That the advice has been provided which is specific to the type of transaction proposed by the member. „

* That the adviser has the required authorisations under the relevant legislation to provide advice on the transfer of safeguarded benefits.

* The reference number of the company or business in which the adviser works. „

* The name of the member that was given the advice and the scheme in which they hold safeguarded benefits to which the advice applies

Source: The Pensions Regulator. Copyright: Money Management.

Hard stance

Only in April last year, the FCA came down hard on firms for not taking enough care over pension transfers. At the time the regulator focused on the inadequate due diligence of the recipient pension schemes, but it also noted that some firms had been treating all clients as ‘insistent’ in order to provide an execution-only service and avoid complying with suitability requirements. Failings were detected, a large number of firms were involved and enforcement actions were imposed.

Pension transfers are not for the faint-hearted and present an unusual ethical dilemma. The authorities advise against it but are going out of their way to ensure consumers can do it if they want to. That puts advisers in an awkward position. Unless there are solid grounds for a positive recommendation, all professional firms involved in a transfer process are at risk.

Both the regulators and client will latch onto any

small mistake in the process if, in the future, there is any suggestion the client might have lost out. But where there is a service required, the laws of supply and demand dictate that providers will be found.

Bob Campion is head of industrial business at Charles Stanley Pan Asset Capital Management