Hurdles to overcome to transfer out of defined benefit schemes
- Learn about the challenges of advising on DB to DC pension transfers.
- Understand the importance of enhanced due diligence on DB to DC pension transfers.
- Comprehend regulatory tightening of the DB to DC pension transfer process.
- Learn about the challenges of advising on DB to DC pension transfers.
- Understand the importance of enhanced due diligence on DB to DC pension transfers.
- Comprehend regulatory tightening of the DB to DC pension transfer process.
Unprecedented numbers of people are seeking to transfer away from their existing defined benefit (DB) pension schemes to take advantage of the April 2015 defined contribution (DC) pension flexibilities. But there is a general sense that the pension system is struggling to cope with the increased transfer demand.
Pension transfers are a frequent source of member complaints, and there have already been more published Pensions Ombudsman decisions on pension transfers in 2017 than in any other year.
How should members, trustees and advisers respond to this challenge?
New rules
April 2015 saw the introduction of new rules which have revolutionised the way in which members of DC schemes can access their retirement pots – using flexi-access drawdown and uncrystallised funds pension lump sums. The new DC regime aims to allow members to tailor their benefits to suit their own requirements. Yet members of DB pension schemes need to transfer to DC arrangements to access these flexible pension benefit options.
Even if an individual would prefer a traditional mix of a tax free cash sum and a lifetime annuity, they may wish to “reshape” their annuity by transferring it out of a DB arrangement into an alternative vehicle (for example, removing an attaching spouse’s pension, or reshaping the rate of pension increases).
Errors or insufficient or late information at just one step of the process can lead to significant delays.It is not just members and firms advising on pension transfers that are expected to benefit if the DB to DC transfer process can be made to work well. The broader economy stands to gain from the release of an estimated £6.6tn of wealth currently locked up in DB pension pots as members spend on property and other goods and services.
The transfer process from a DB to a DC arrangement is not easy, however. The legislation requires members to request a transfer value, the trustees of the DB scheme to then provide a statement of entitlement, and the member and their adviser to liaise with the transferring DB scheme and the receiving DC arrangement to ensure the transfer can be made within the relevant statutory deadlines. Otherwise, the member loses their guaranteed cash equivalent transfer value.
Errors or insufficient or late information at just one step of the process can lead to significant delays. A significant number of Pensions Ombudsman complaints focus on delays beyond the transfer deadline date caused by administrative error. These errors include trustees sending member correspondence to an incorrect address and trustees being unable to process required information within the transfer deadline – commonly because members, advisers and receiving scheme trustees do not provide sufficient and timely information.
