Pension transfer legislation has moved to give greater protection to consumers but in some cases the interpretation of the law is inconsistent and can create problems for the end client.
Knowing where potential issues may arise, what the laws allow and where there may be regulatory exemptions, is therefore important.
This is especially the case where defined benefit (DB) to defined contribution (DC) transfers are concerned.
As Neil MacGillivray, head of technical support at James Hay, comments: “Out of the vast number of DB to DC transfer requests, only a few will be justifiable from an advice perspective.
“Advisers will need to be confident they have looked at all aspects and alternative solutions, and that the advice to transfer is watertight. The last thing the industry needs is another pensions transfer scandal.”
Duty to members
For non-DB schemes, the Pension Schemes Act 2015 makes allowance for managers to act in the best interests of their pension scheme members, even allowing the managers to override legislation in order to help members.
So for advisers whose clients are in a shared risk scheme or defined contribution scheme, under which any of the benefits that may be provided are collective benefits, this could be a useful ruling to cite if providers are reluctant to allow the flexibilities that pension freedoms allow.
Section 37 of the Pension Schemes Act 2015 says: “The Secretary of state may by regulations impose a duty on the managers of a relevant non-trust based scheme to act in the best interests of members when taking decisions of a specified decision.
“Regulations under this section may provide for the duty to act in the best intersts of members to override obligations that are inconsistent with that duty (including obligations imposed by any legilative provision, rule of law or provision of a scheme or other instrument.
“This may provide for the consequences of a manager breaching the duty to act in the best interests of members to be the same as the consequences of breaching a fiducary duty owed by the manager to the members.”
This is a helpful piece of legislation to bear in mind with shared risk or DC schemes - but the legislation does not yet allow ‘duty to act in the best interests of members’ with regards to defined benefits schemes.
Having the appropriate specialist permission for DB to DC transfers is paramount. This would require advisers to sit AF3 - the pension transfer exam.
The Financial Conduct Authority’s (FCA)’s pension transfer rules stipulate to do a DB transfer, one must have a specialist permission - the Pensions Transfer Specialist (PTS).
The FCA’s Sourcebook defines a specialist as: “an individual appointed by a firm to check the suitability of a pension transfer, pension conversion or pension opt-out who has passed the required examinations as specified in the Training and Competence Sourcebook”.