Regis House, First Floor, 45 King William Street, London EC4R 9AN Tel: +44(0) Web:

Transcription

1 Regis House, First Floor, 45 King William Street, London EC4R 9AN Tel: +44(0) Web: 17 March 2015 Philip Worsfold The Pensions Regulator Napier House Trafalgar Place Brighton BN1 4DW Dear Philip DB to DC transfers and conversions I am writing on behalf of the Association of Consulting Actuaries (ACA) in response to the above named consultation document issued on 12 February Our comments on the specific questions you raised are set out in the Appendix to this letter along with some general observations and some drafting points. We hope that you find our comments of assistance and would be happy to discuss them further if that is helpful. Please contact either me on (david.everett@lcp.uk.com) or my colleague, Deborah Cooper on who prepared this response (Deborah.R.Cooper@mercer.com). Yours sincerely David Everett Chairman ACA Pension Schemes Committee Sent by to: DBDCTransfers@tpr.gov.uk Page 1 of 6

2 APPENDIX DB to DC transfers The introduction to the consultation implies that its purpose is to help trustees consider when to consider reducing members transfer values and how to apply to the Pensions Regulator for more time to make a transfer payment. However, the guidance covers a wider range of topics and to some extent, overlaps with the guidance on transfer values you published in Our view is that a single document with guidance on transfers (and conversions although the consultation document does not refer to any special considerations regarding conversions) would be preferable. If the guidance is kept separate from the existing DB transfer guidance, it might be helpful if its title reflected the new terminology (that is, safeguarded and flexible benefits), although then there s a risk that until people are familiar with the new jargon, its application might be unclear. In the sections titled Transfer requests and The requirement to take appropriate independent advice it s possible that you felt the need to set out the steps provided for in legislation, since some of the detail was in regulations that was not publicly available when the consultation was published. However, once the regulations are final, it seems excessive to repeat their requirements in the guidance (particularly without clearly distinguishing what is a statutory requirement and what is a best practice expectation for example, paragraph 25 contains both), other than, perhaps, as a helpful flow chart setting out the timelines the process imposes. Similarly, the final version could make clear where terms are defined in legislation. For example, in paragraph 19, the guidance refers to appropriate financial advice, and it could be inferred that trustees are required to check that the financial advice received was appropriate for the member, which is not the case (nor, we expect, your intention, which is clarified in paragraph 22). Particular questions: Does this guidance cover the issues DB trustees will need to manage in the transition to new pension flexibilities? If not, what is not addressed? Within the regulatory structure that applies to most defined benefit (DB) occupational pension schemes, there are no new flexibilities. In fact, the position has become more restrictive because of the need for advice to be taken before some transfers or conversions of safeguarded benefits can proceed. The difference is that, because new flexibilities have been extended to defined contribution schemes (actually, to any pension arrangement providing flexible benefits ), trustees are being expected to act as gate keepers, to make it appear that members with safeguarded benefits wanting to transfer their accrued rights to access the new flexibility will only do so having had the associated risks explained to them. The guidance attempts to address this in several ways, which will not always be helpful to trustees: The guidance reiterates your view (see paragraph 3) that it is unlikely to be in members best interests to transfer safeguarded benefits away from a DB Page 2 of 6

3 arrangement. Trustees following the guidance will have to start from that perspective, although (whether or not you are correct) they generally do not have enough information about individual members to form a view. At least in respect of those members with a statutory right to a transfer, legislation currently gives a right to transfer provided it is calculated and paid in a particular way. It seems odd to expect trustees to consider this is not a legitimate option since, regardless of their views, provided the process has been followed properly, legislation requires them to make the payment. Your statement in paragraph 3 just raises the risk that, with the benefit of hindsight, someone might criticise trustees for having carried out their statutory responsibilities, rather than acting to protect members against the ravages of market forces. The guidance does note (in paragraph 11) that trustees should not second-guess members individual circumstances, nor is it their role to prevent a member from making decisions which the trustees might consider to be inappropriate and the (currently draft) legislation sets out the steps trustees must take regarding financial advice before the transfer can be paid. However, the guidance suggests that, in addition to the required check against the FCA s register, trustees should occasionally delve deeper into the service provided by the financial adviser (see paragraph 25). We think this could be an unduly onerous obligation: we would understand guidance suggesting that trustees and employers should consider how they can facilitate access to good quality financial advice (for example, by appointing an adviser or advisory firm, having undergone due diligence in relation to him, her or it), but to expect them to carry out independent checks, essentially fishing expeditions, seems unreasonable. The FCA should police its register, not trustees. There is also a suggestion (in paragraph 12c) that trustees should tell members what advice to expect from their financial advisor. We think this is inappropriate. It would seem more appropriate for the FCA to provide information to consumers about what they should be able to expect from financial advisers, and trustees could then point members to a page on the FCA s website. We have similar views in relation to trustees carrying out proper due diligence in relation to the receiving arrangement to ensure that it is a legitimate arrangement (paragraphs 34-35). Trustees generally are very conscious of their obligations towards their members and their administrators carry out extensive checks to mitigate the risk of members becoming victims of pension scams. Nonetheless, the new flexibilities, which have been widely welcomed, are predicated on the Government s view that individuals should be trusted to know what to do with their savings. In that case, it seems unreasonable to require trustees to decide that their members are, in fact, not to be trusted to make decisions: in particular, the risk that, actually, individuals will make wrong decisions seems too big a buck to pass away from government and regulators to trustees. More specifically, giving trustees such a potentially open obligation (if that is what you intend) seems likely to mean that, with hindsight, it could seem that insufficient checks were done, opening them (and sponsoring employers) to the risk that members who turn out to have made the wrong decision might seek redress. Page 3 of 6

4 We expect you have included these additional suggestions with a view to protecting members interests and we do not underestimate how important this is. However, we think this can be achieved in a way that is more proportionate and achievable for trustees, for example, by appointing a provider as suggested above, or by providing good quality communications. We also feel the section on applying to the Regulator for more time to consider transfer requests could be more helpful. Currently, it lists the circumstances where trustees can make such an application, which are in any case in legislation, but it says nothing about how you will view such requests: for example, whether you would always grant a request where trustees are waiting for an insufficiency report to be completed, or whether an application would only be granted if there were good reasons why the trustees had not commissioned a report earlier. Finally, although the title refers to conversions, there is nothing explicit in the document that covers these exercises. It would be helpful to know whether this is an oversight, or just that you consider that the principles are exactly the same for transfers and conversions (which we would find surprising, since a conversion is more likely to be employer led). Does this guidance describe the good governance needed to balance the interests of members and effectively manage transfers from April 2015? If not, what should be included? Immediately following the heading Consultation proposal you state that trustees have a duty to act in the members best interests. Our understanding (although we are not lawyers) is that the trustees duty is more nuanced than that, and relates to how they implement their duties under the Trust Deed, rather than the interests of members generally. Many of the indications of good governance included in the proposed document seem reasonable, but we are concerned that some of the others potentially impose responsibilities on trustees that are far beyond what they might reasonably have expected. Since the statutory transfer process hasn t changed materially, our view is that the existing transfer guidance fairly comprehensively covers most of the technical and governance issues that trustees have to consider in relation to transfer value calculations. Following the new Code of Practice on Funding, and the new incentives to transfer the Government has created, the Regulator might want to refresh its guidance. However, adding the sections of the DB to DC transfers and conversions guidance that apply to the new requirements (largely, financial advice) to a refreshed transfer guidance seems likely to produce the best outcome. The area where further guidance might be needed is with regard to non-statutory transfer values: the consultation seems silent on this and the existing 2008 guidance only says Unless scheme rules specify how such transfer values must be calculated, the trustees must decide on their approach, and that normally it would expect the statutory basis to be used. We expect that, if there is a change in practice due to the new flexibilities, many of the new requests will come from members close to their normal pension age and could Page 4 of 6

5 result in an increase in non-statutory payments. There might also be increased requests for partial transfers. Where scheme rules are silent on the treatment of non-statutory transfers (which we expect they generally will be), trustees might appreciate guidance about when they can reasonably depart from the statutory approach. For example, a statutory transfer value cannot allow for commutation at retirement (if the commutation rate is less than the cash equivalent cost of the pension being commuted), so some bases result in transfer values for those close to retirement that are greater than the liabilities for the member s benefits, calculated on a technical provisions basis. We would be happy to contribute to the development of such guidance. Generally, we expect trustees would want to treat members fairly and consistently, however, in these circumstances, trustees might be advised to consider the principle underlying the transfer regulations, reflecting the best estimate cost to the scheme, rather than being constrained by the requirement to exclude certain options from the benefits included in the calculation. Does the existing technical guidance provide sufficient flexibility for DB trustees to respond to new pension flexibilities? If not, what additional information would assist? If the change results in large numbers of members wanting to take transfer values at or close to retirement, then we think the approach to reductions in the technical guidance might need to be reviewed. In particular, it might be helpful for trustees to understand how this might be applied to non-statutory transfers. The 2008 guidance suggests that, where reductions are made, trustees normal preference should be to take the statutory priority order into account, as a result protecting PPF compensation levels relative to the excess, but we are not sure this remains so relevant in relation to non-statutory transfers. For example, members might only want to access the new flexibility in respect of part of their benefit: do you have any views about whether and, if so, how reductions could be applied in this case? General comments on wording In paragraph 3, you say that it is unlikely that the application of best estimate assumptions would provide benefits of equal value as those given up. It might be more reasonable to say that Although the transfer value represents the best estimate of the cost to the scheme of providing the benefits being given up, this is not necessarily the same as a best estimate cost to an individual member. Paragraph 11 seems quite loosely worded. We would prefer: Trustees are not expected to form an opinion on the individual s choice or their circumstances. In paragraph 16, members have a statutory right to request a transfer value, not a transfer. In paragraph 16.d, we would prefer for the transfer value to be paid, rather than to obtain the transfer value. Page 5 of 6

6 Paragraph 38 says trustees should avoid giving the impression that the transfer value represents the full value of the member s safeguarded benefits. It s possible that this paragraph refers back to paragraph 37, but it is unclear. If it does not, then we expect that full value is intended to refer to the cost of providing the member s safeguarded benefit via a deferred annuity, in which case this should be made clear. Unless the transfer value is being reduced, it does represent the full value using a prescribed transfer value basis. After paragraph 44.e. the and should be an or. About the Association of Consulting Actuaries (ACA) Members of the ACA provide advice to thousands of pension schemes, including most of the country s largest schemes. Members of the Association are all qualified actuaries and all actuarial advice given is subject to the Actuaries Code. Advice given to clients is independent and impartial. ACA members include the scheme actuaries to schemes covering the majority of members of private sector defined benefit pension schemes. The ACA is the representative body for UK consulting actuaries, whilst the Institute and Faculty of Actuaries is the professional body. Regis House First Floor 45 King William Street London EC4R 9AN Tel: acahelp@aca.org.uk Web: 17 March 2015 Page 6 of 6