Guidance for trustees as TPR consults on DB to DC transfers

Clare Lloyd-Williams contributed to the writing of this blog post

The Pensions Regulator (TPR) has published a consultation on guidance for trustees of defined benefit (DB) schemes regarding member requests for transfers from DB to defined contribution (DC) schemes from 6 April 2015.

The consultation follows the Government’s announcement that it will not ban transfers from private sector DB to DC schemes, subject to two safeguards:

• individuals will be required to take independent financial advice for transfer values (other than solely money purchase or cash balance benefits) over £30,000; and
• new guidance for trustees on the use of their current powers to delay transfer payments and reduce transfer values.

TPR’s consultation covers this new guidance, and also sets out useful details regarding trustees’ responsibilities to make sure members have taken advice.

Trustees should prepare for an increase in the number of transfer requests they receive from members in light of the additional flexibilities announced in the 2014 Budget. 

Advice requirement

TPR believes, and we agree, that it is likely to be in the best financial interests of the majority of members to remain in their DB scheme.  However, TPR acknowledges that this may not be in all members’ interests – for example, a member who has no dependants, or who is in poor health.  TPR clearly states within the draft guidance that it is not the trustees’ role to prevent a member from making decisions which they may consider inappropriate in the member’s circumstances.

To ensure that members who wish to explore a transfer are aware of the advice requirement, TPR suggests that trustees may wish to update their scheme booklet, and provide information on finding an FCA authorised adviser.

Trustee powers

Transfers of DB benefits out of a scheme pose certain risks to the funding of the scheme.  It is the trustees’ responsibility to weigh up the interests of members who wish to transfer out of the scheme with those wishing to remain in the scheme.  The issues involved include:

Liquidity

Liquidity issues may arise if members nearing retirement wish to transfer their benefits out of the scheme, and this may have further implications for the scheme’s investment strategy.  This could be a particular issue for small schemes where some members may have large transfer values relative to the scheme’s assets.

Transfer value basis

Trustees should review and change assumptions used to calculate transfer values if they consider this to be appropriate.   Trustees can also reduce transfer values in situations where the scheme is underfunded, and this may be worth consideration in the current economic environment – even where a scheme was well funded at a valuation one or two years ago, the funding position is likely to look very different today.

Pension liberation fraud

Trustees will have a heightened awareness of pension scams under the new pension flexibilities.  Trustees can assist members by explaining to them what the advice they take should cover, and may apply to TPR to delay a transfer value request while they are carrying out checks on the receiving scheme.

Administration

Trustees should have adequate processes in place for dealing with the increase in transfer requests.

TPR welcomes feedback from trustees and other interested parties on its consultation document and the closing date for responses is 17 March 2015.  TPR hopes to publish the final guidance shortly thereafter.

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Key points:

• trustees should prepare for an increase in the number of transfer requests they receive
• trustees and their administrators should be alive to a heightened risk of pension liberation fraud
• trustees should review their transfer value basis and any level of reduction that should apply
• trustees should consider the liquidity within their investment strategy