Pension transfers from occupational pension schemes in wind-up

Transcription

1 Direct line: Local fax: ADDRESS November 2003 Our Ref: Dear Pension transfers from occupational pension schemes in wind-up A review of recent queries to the Investment Firms Division Contact Centre has highlighted that some firms are unclear about how our rules apply to pension transfers from occupational pension schemes that are winding up. These are summarised in the attached Question and Answer (Q&A) sheet. To help ensure that all firms are applying the rules correctly, we thought it would be useful to write to all independent financial advisers to remind you of the relevant rules in the Conduct of Business sourcebook (COBs). This letter and accompanying Q&A sheet aim to clarify the key issues in this area and to remind you of issues already covered in the FSA Handbook and elsewhere. Key messages Definition of pension transfer The rules for pension transfers from occupational pension schemes in wind-up are the same as for transfers from active schemes. There are no exceptions: the same rules apply, even when wind-up is nearly complete. The Glossary of the FSA Handbook currently defines a pension transfer as: A transaction resulting from a decision made, with or without advice from a firm, by a customer who is an individual, to transfer deferred benefits from: (a) an occupational pension scheme; or (b) an individual pension contract providing fixed or guaranteed benefits that replaced similar benefits under a defined benefits pension scheme;

2 to a stakeholder pension scheme or personal pension scheme (including a selfinvested personal pension scheme). * We consider transfers to deferred annuities (including pension buy-out contracts) to be included in our definition of pension transfers. However, as the current definition does not specifically refer to transfers to deferred annuities, we have proposed (in Consultation Paper 199) to change the definition. The proposed changes will make it clear that our definition of pension transfers includes any transfer of individuals benefits to any kind of deferred annuity policy (including a pension buy-out contract) where the eventual benefits depend on investment performance up to retirement. Our definition of an occupational pension scheme includes defined benefit (final salary) and defined contribution (money purchase) schemes. Executive pension plans and small self-administered schemes are also occupational pension schemes but can fall into either category. Transfers between personal or stakeholder pensions do not fall within our definition of pension transfers, but still need to meet the suitability rules in COBS. Training and competence Advisers must follow the rules in COBS, in particular ( and ) when advising on pension transfers. All pension transfer advice must be checked and signed off by a properly qualified and authorised pension transfer specialist. Advisers who are not pensions transfer specialists can advise customers about pension transfers, but they must advise according to strict procedures and a pension transfer specialist must check their recommendations before they are presented to the customer. The role of a pension transfer specialist requires approval in a controlled function (CF24). If a pension transfer specialist also wishes to advise customers, this is a separate controlled function and requires separate approval (CF 21). Currently, a pension transfer specialist must hold one of the approved examinations from the list set out in the Training and Competence sourcebook, Annex 4, Table 3. It is up to firms senior management to decide which of these qualifications are appropriate for their employees. However, Consultation Paper 194 proposes that firm s senior management should decide which examinations are appropriate rather than adhering to the examination annexes in the Training and Competence sourcebook. (Firms will be able to refer to a list held by the Skills Council for Financial Services to assist them.) Firms senior management are responsible for ensuring that their employees are appropriately qualified and competent to carry out their role. * Part (c) of the definition has been omitted as it is not relevant when deciding whether a transaction is a pension transfer in the context of an occupational pension scheme winding up.

3 Firms that have overlooked our requirements are responsible for making sure that any breaches are put right. If you find yourself in this situation you should first contact your usual supervisory contact at the FSA who will help you to identify any remedial action you need to take. Providing advice and giving information Different rules apply to giving advice and providing information and we are concerned about where the line between the two is being drawn. Advisers must ensure that, if any personal recommendations are made, the rules (in COBS) for advised sales are complied with. I hope that you have found this letter and the accompanying Q&A sheet useful. If you have any questions on the issues covered, please approach your usual supervisory contact. In addition, we have recently launched a suite of website pages dedicated to helping small IFAs. These pages will be updated on a regular basis, so I encourage you to log on regularly to keep yourself informed about the latest developments that affect your business. Further information is given in the enclosed leaflet. Yours sincerely Chris Rexworthy Head of Department Investment Firms Division

4 Frequently asked questions about transfers from occupational pension schemes in wind-up 1. My customer s defined benefit occupational pension scheme is being wound up and the trustees intend to buy out her benefits through a deferred annuity contract. My customer would like to transfer her benefits to a stakeholder pension instead. As, whatever happens, she will not be able to remain in the occupational scheme, is this classed as a transfer or should I simply compare the benefits of the deferred annuity with a stakeholder pension? Until the occupational pension scheme is actually wound up, any transfer out of it must be treated as a pension transfer. So, in this situation you must follow the rules specified in the Conduct of Business sourcebook and your recommendations must be checked by a pension transfer specialist. If your customer had approached you after her benefits had been transferred to the deferred annuity contract, the situation could still be the same. If a deferred annuity contract contains fixed or guaranteed benefits, a transfer to a stakeholder pension would still be a pension transfer. 2. I am assisting a customer whose previous employer is insolvent and is winding up its defined benefit occupational pension scheme. The scheme is under-funded and my customer wants to know if she should transfer her deferred pension. When I carry out a transfer value analysis, should I compare the benefits and drawbacks of transfer with the full benefits of the scheme or with an estimate of the actual benefits my customer is likely to receive? Winding up an occupational pension scheme can be a long and complicated process, particularly where the employer is insolvent. The scheme may not be able to provide your customer with the full benefits promised; however, it is difficult to determine what benefits it might actually provide her with. What you must try to do is compare benefits on a like for like basis. For example, if the scheme trustees expect to provide your customer with 80% of her full benefits then you should compare a transfer with 80% of her full scheme benefit. If you want to use an estimate of the benefits a scheme will provide, you should request one from the scheme trustees. Only estimates of benefits provided by the scheme trustees should be used; you should not attempt to estimate benefits yourself. 3. I have been asked to assist a board of trustees to wind up a defined benefit occupational pension scheme. The trustees are offering members the choice of securing their benefits through a section-32 policy (the default option) or taking a transfer value. Should the employer allow members to transfer their benefits into its designated stakeholder pension? The employer has no say in whether employees can transfer their benefits to a stakeholder pension, as it is a direct contract between an individual and a provider. Page 1 of 3

5 In any case, stakeholder pension providers cannot refuse to accept transfer values. Although it is not compulsory, the trustees should encourage members to take advice as pension transfers are complicated and it is difficult to make suitable decisions without advice, even when all the relevant information is provided. 4. My firm has received numerous enquiries from customers concerned about their defined benefit occupational pension schemes and interested in transferring their benefits. What, if any, qualifications do I need to advise them and how do I obtain the correct authorisations? Pension transfers are a very complicated area. You must follow strict procedures designed by a pension transfer specialist when giving advice. To give advice on pension transfers, you need to hold one of the qualifications listed in annex 3, table 1 in the Training and Competence sourcebook (TC). The firm should also have assessed you as competent and you must have approval in CF 21. The pension transfer specialist must check any pension transfer recommendations you make before you present them to customers. The role of a pension transfer specialist requires separate approval in a controlled function (CF24) and requires specific qualifications and authorisation. At present, a pension transfer specialist must hold one of the following approved examinations, listed in TC, annex 4, table 3: Fellow or Associate of the Faculty of Actuaries; Fellow or Associate of the Institute of Actuaries; Fellow or Associate (by examination) of the Pensions Management Institute; Fellow or Associate of the Chartered Insurance Institute (including three pensions-related subjects as confirmed by the examining body); G60 paper of the Chartered Insurance Institute Advanced Financial Planning Certificate; or Pensions paper of the Chartered Institute of Bankers Professional Investment Certificate. It is the responsibility of firms senior management to decide which approved examination is appropriate for their employees. A pension transfer specialist must be assessed as competent for this role. 5. An adviser at my firm recently advised a customer about moving her benefits away from a defined benefit occupational pension scheme in wind-up. I now realise that this was a pension transfer and that the adviser in question was not authorised to give this advice. What should I do? Firstly, you must report this breach to your usual FSA supervisory contact. They will help you to decide what remedial action you need to take. Secondly, you should review your Training and Competence (T&C) scheme, to prevent similar breaches in future. It is the responsibility of senior management to ensure that their employees are appropriately qualified and competent to carry out their roles. If this is an Page 2 of 3

6 isolated incident it might be an honest mistake but you should check that it is not a symptom of wider failings in your T&C scheme. 6. A longstanding customer of mine has recently contacted me, as his defined benefit occupational pension scheme is being wound up. Inspired by a newspaper article, he has decided, without my input, to transfer his benefits to a self-invested personal pension and wants some guidance as to which one might suit him. If I help him with only the selection of a new provider, will I need to classify this as a pension transfer? When you give advice you must consider the whole transaction you cannot advise on the selection of a new provider in isolation. Although your customer has not sought your advice on the merits or otherwise of his decision, this transaction will still be a pension transfer. You can only advise your customer if you do so according to a pension transfer specialist s procedures and if a pension transfer specialist checks your recommendations before you present them to your customer. Otherwise, you should refer him to another adviser. As noted previously, pension transfers are a complicated area and your customer might benefit from speaking with an adviser specialising in this area to ensure that he understands all the issues involved. Page 3 of 3