By the end of this learning outcome you will be able to explain the following: FCA rules on transfers; Public sector transfers; Member rights to

Transcription

1 By the end of this learning outcome you will be able to explain the following: FCA rules on transfers; Public sector transfers; Member rights to transfer; Transfer where the member has protected tax free cash or protected pension age; Transferring crystallised benefits.

2 The increased pension flexibilities has lead to an increase in the number of transfer requests where the existing scheme is unwilling or unable to offer full access to these new flexibilities. There are two main possible risks associated with these requests: A transfer may not be in the best financial interest of the individual and A large volume of transfers could destabilise a DB scheme. In the following sections we will consider the changes to the rules that have been brought into place to try to help counter these risks. A Transfer rights of members In light of the new flexibilities members of unfunded public sector schemes do not have an automatic right to transfer their benefits, we will cover the reasons why later in this module. New rules and guidance has been introduced for members of private sector schemes and funded public sector schemes. A1 Types of benefits Two categories of benefits held in a scheme: Flexible benefits money purchase benefits, cash balance benefits and a third type of benefit which could fall within both categories. Safeguarded benefits Any benefits that are not either money purchase or cash balance benefits. Where there is doubt about the status of benefits and how to treat them, trustees should treat this third type of benefits as safeguarded benefits unless there is a good reason to treat them differently. Included within the Pension Schemes Act 2015 was the right for a pension scheme member to be allowed to transfer a specific category, not necessarily all of their benefits under the scheme. So if the scheme includes both DB and MP benefits the member could, possibly, transfer just the MP benefits and leave the DB benefits within the scheme. A2 Transferring flexible benefits Since 6 April 2015 a deferred member with flexible benefits has the right to a transfer value up to the date of crystallisation as opposed to up to one year before the scheme s normal retirement date as it was before. But, there are 3 conditions: Member has to be deferred member of the scheme Member has to have flexible benefits under the scheme The member must exercise the right before crystallisation

3 A3 Transferring safeguarded benefits Members with safeguarded rights have the right to transfer the safeguarded benefits away from the scheme if they are more than one year away from the scheme s normal pension age, i.e. this has not changed in respect of safeguarded benefits. However, this will be subject to the requirement that they seek appropriate independent advice. The Pension Schemes Act 2015 states that appropriate independent advice is that which is given by and authorised independent adviser who has relevant transfer permissions specified under regulations. The regulations dealing with this are described in article 53E of FSMA 2000 (Regulated Activities) Order To advise on a transfer of safeguarded benefits an adviser must have the appropriate qualifications available under various qualified bodies that allow an adviser to gain pension transfer specialist status with the FCA. This requirement only applies where the member s CETV in respect of their safeguarded benefits is in excess of 30,000. If the CETV is in excess of 30,000 the trustees of the scheme must see evidence that the member has received such advice, without this evidence the transfer cannot take place. Unless the transfer is employer instigated the member will be expected to cover the cost of this advice. FSMA 2000 has made the conversion of safeguarded benefits into flexible benefits a regulated activity. The advice will be regulated where: The individual receiving the advice is the pension scheme member or survivor of the member They have safeguarded benefits The advice concerns converting safeguarded benefits to flexible benefits or to receive an UFPLS. Where the relevant minister reasonably expects such a transfer significantly increases the risk or level of payments needed out of public funds to support the pension scheme in order to meet it s liabilities he may, under the Pension Schemes Act 2015 reduce the CETV. This is in line with the ability of scheme trustees of private sector schemes to reduce a CETV if the scheme is underfunded. A4 Unfunded public sector schemes Before the introduction of the new flexibilities few transfers were made between public sector pension schemes and money purchase schemes each year. Because of the concern that the introduction of the new flexibilities may make the idea of transferring from public sector schemes to money purchase schemes more attractive, meaning the cost would fall on the taxpayer, members of unfunded public sector schemes are not able to transfer their benefits to flexibly access their benefits. The principle examples of such schemes are the NHS, teachers and civil service schemes.

4 B Trustees duties It may be helpful for you to study The Pensions Regulator s regulatory guidance on DB to DC transfers and conversions here To help counteract the risks associated with such transfers the following have been introduced: The member must receive appropriate independent advice where safeguarded benefits are in excess of 30,000. The Pensions regulator (TPR) has issued guidance to trustees on when it may be possible to reduce the transfer value in order to protect continuing members Trustees can ask for more time to carry out the member s transfer request. B1Impact on trustees TPR recognises that trustees of DB schemes and their advisers are likely to face general issues such as: Whether to commission a fresh assessment of the scheme s funding position More members requesting transfer information Impacts on the schemes investment strategy and liquidity due to increase in members choosing to transfer at age 55 or closer to retirement age More employers promoting transfers to reduce their exposure to scheme risks Members choosing to transfer even if it s not in their best interest Heightened or changing risk of pension scams. The statutory basis for calculation of transfer values remains unchanged. B2 Transfer requests While the trustees duties remain largely the same, TPR has reissued the requirements to take into account the new obligation for members to receive appropriate independent advice. The trustees must also ensure that they comply with the requirements under the Contracting-out (Transfer and Transfer Payments) Regulations 1996 with regards to any contracted-out safeguarded benefits.

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6 B2A Independent Advice The trustees must not transfer the benefits until they have received a written transfer request from the member along with written confirmation, signed by the adviser of the following: The adviser has the relevant permissions to advice on pension transfers The advice has covered the member s request to transfer safeguarded benefits The full name of the member and the scheme The adviser s FCA registration number The trustees must then check the adviser s details on the Financial Services Register and if they have concerns must report these concerns to the FCA. If there are problems and/or concerns with any aspect of the advice or people involved in the advice process the member must be contacted and informed that the transfer will not go ahead until these concerns have been satisfied. If these concerns cannot be resolved the transfer is at risk if it cannot go ahead within 3 months of the guarantee date. Trustees must keep a record of the checks they have made and the written confirmation from the adviser, they do not, however, have to receive a copy of the advice and recommendation made to the member. TPR have recommended that all documentation sent to members be updated to explain the impact of the new flexibilities. B2B Due diligence on receiving scheme If on completing proper due diligence on the receiving scheme the trustees have reason to suspect it is not a legitimate scheme they should consider very carefully whether the transfer should go ahead. TPR provides a checklist of common indicators of a pension scam and gives guidance for trustees on making further enquiries. TPR guidance and checklist can be found here: B2C Applying for more time to complete a transfer Whilst TPR expects the majority of transfer requests to be completed within the statutory timescale, and are not able to waive the trustees legal duty, the trustees do not have to proceed with the transfer if there is any concern over the advice received or they have been unable to perform checks due to factors outside of their control. TPR may extend the six-month payment deadline in limited circumstances if the trustees make an application within the six-month period. They should indicate the amount of extra time they require and the reasons for the application.

7 These circumstances are: Scheme is being wound up or about to be wound up The interest of the members would be prejudiced by the transfer The member has not taken all steps to enable the trustees to make the transfer Insufficient information provided to carry out the transfer A dispute between the member and scheme over the transfer value The scheme is ceasing to be contracted-out B3 Transfer value assumptions and scheme funding The statutory basis and approach to the calculation of CETVs is unchanged. No weaker than best estimate level, but can be below this in certain circumstances as laid out in legislation. TPR has guidance on transfer values on their website - Trustees must consider the impact on scheme funding if there is a significant increase in members asking to transfer. TPR s code of practice 03 provides detailed guidance on this. It may be necessary for trustees to consider: Current and future age profiles; Likely member demand; and Size of transfers as they could impact on investment returns, liquidity and views on the strength of the employer s covenant. Trustees should identify any potential for different classes of transferring members disproportionately affecting scheme funding. Care will be especially important for smaller schemes where the departure of a few members with very large transfer values relative to the total scheme assets could have disproportionate impact on the funding of the scheme. In some situations reducing transfer values for underfunding may be appropriate. Trustees may request that their actuary prepares an insufficiency report trustees may commission this where, on the date of the report (which must be after the effective date of the last actuarial valuation), the scheme s assets were insufficient to cover its liabilities. Decisions to reduce transfer values should be kept under review to ensure the level of reduction remains appropriate. The position may change, for example, if a significant number of reduced transfer values are paid out of the scheme. Any statement of entitlement issued to a member as a result of a transfer request which includes a statement explaining the transfer value has been reduced must include the following: How much it s been reduced by The reasons for the reduction and An estimate of a date when an unreduced value may be available. Trustees should consider very carefully before carrying out any incentive exercise to transfer DB benefits into a money purchase scheme. TPRs offers guidance regarding this here:

8 there is also an industry code of practice. C Transitional rules Various transitional rules were put in place following the 2014 Budget, let s have a look at these. You will see that the deadline for exercising these options was 5 April 2015, but some had secondary deadlines at a later date within 2015/16. C1 Block transfers As part of the 2014 Budget, the Chancellor announced some transitional rules surrounding block transfers for clients who have reached, or will reach normal minimum pension age on or before 5 October 2015 to allow them to make a block transfer as a single member. The rules for this were as follows: 1. The transfer is made between 19 March 2014 and 6 April All the member s benefits under the receiving scheme, (not just the transferred benefits), come into payment before 6 October All of the sums and assets that represent the member s rights under the original scheme are transferred 4. The transfer is made as a single transaction If the above provisos are adhered to then the client will have been deemed to have made a block transfer. This enabled the member to retain their transitionally protected TFC and/or protected retirement age. For these transitional cases there is no requirement for another member of the scheme to transfer at the same time and there is also no restriction on how long the member has been a member of the receiving scheme. C2 Extended time to pay PCLS To enable the individual to take advantage of the new flexibilities, under money purchase arrangements, the 18 month period for paying PCLS and the associated pension (six months before and 12 months after becoming entitled to the pension) was extended in certain circumstances where the individual becomes entitled to the associated pension before 6 October These rules apply where: PCLS was paid on or after 19 September 2013 but before 6 April 2015 or Before 19 September 2013, where a lifetime annuity was purchased, and on or after 19 March 2014 where the annuity contract is cancelled. This only applies where the lump sum is paid from a money purchase arrangement (including cash balance arrangements). However the associated pension can be paid from either a MP or DB arrangement. If the client dies before 6 October 2015, without becoming entitled to the associated pension, the PCLS will have been paid but no associated pension taken. In these circumstances, the PCLS will still be treated as an authorised payment. The residual funds

9 would not have been crystallised and can, therefore be paid as an uncrystallised funds lumpsum death benefit. There is no change to the maximum amount of lump sum that can be paid as a PCLS. Should the fund value of the residual amount fall, as long as the entitlement to the pension arises before 6 October 2015, the PCLS will still be an authorised lump sum payment. D Automatic transfers Since the introduction of automatic enrolment, more people will find themselves paying into a pension. If their circumstances change, they may end up paying into different pension pots over their working life. These can be difficult to maintain and combining several pots can be time consuming. The Pensions Act 2014 introduced legislation to create a pot follows member automatic transfer system in an effort to reduce the number of stranded dormant pensions. This was due to come into effect in October 2016 but has been deferred by the government. E Short-service refunds Prior to 1 October 2015 the position was as follows: If members have at least three months' but less than two years' qualifying service they can elect to receive a refund of employee contributions (known as a short service refund) or transfer their benefits. If members do not make an election within a certain period, trustees can choose to pay the short service refund. If members have at least two years' qualifying service, the scheme must make provision so that they are entitled to benefits under the scheme (this is known as 'short service benefit'). The statutory transfer rules also apply. In practice, scheme rules could provide that members become entitled to benefit under the scheme more quickly than two years and, if so, the right to a short service refund would come to an end at that earlier date. If a member has more than one period of pensionable service, the general principle is that these are aggregated for the purposes of assessing the length of service. However, from 1 October 2015, where all of the member s pension benefits are non-salary related or where it is a collective benefit: The period of qualifying service needed for the member to be entitled to benefits from the scheme is being changed to 30 days instead of the current two years for DC members who first join the scheme on or after 1 October This means that short service refunds are abolished for such members. Where a member s pensionable service begins before 1 October 2015, the previous requirements for preservation of benefits will continue to apply. The two-year rule for salary-related short-service refunds still applies. Personal pensions and Stakeholder plans have never been able to offer short-service refunds as such. A refund of contributions could be made in the following situations:

10 Cooling-off notice signed within the cooling-off period An opt-out is taken up within the 30 day opt-out window for auto enrolment schemes or The member has made personal contributions, in a tax year, in excess of their relevant UK earnings