Simplification of DC to DC bulk transfers without consent
In December last year the DWP issued a call for evidence to look at the issues around the rules for DC to DC transfers between occupational schemes without member consent. This was looked at in our January edition of Compass. The DWP has now issued a consultation and draft regulations which it intends to bring into force from 6 April 2018.
The consultation gives a clear idea of how the new rules will apply from April, albeit some of the fine detail may change.
The changes refer to ‘pure’ DC bulk transfers between trust-based schemes. Scheme funds with any attaching guarantee such as guaranteed annuity rates or guaranteed investment returns are outside this regime. The changes do not affect orphaned schemes (with no identifiable trustees or sponsor) or stakeholder schemes.
The need for change
The DWP is keen to encourage further consolidation of DC pension schemes. According to scheme return data, DC schemes with less than 1000 members account for around 83% of all DC schemes, but only around 3% of pension scheme savers.
Currently the rules around pension scheme bulk transfers without consent are based on rules designed to protect members of defined benefit schemes. In the call for evidence the DWP identified two main areas ripe for change and this consultation confirms its intention to make those changes. These were the certification requirement and the scheme relationship condition.
There are now three main proposals:
1) Amendment to the requirement for actuarial certification
Currently the trustees must get an actuary to certify that in their opinion the transfer credits to be acquired for each member under the receiving scheme are broadly no less favourable than the rights to be transferred. This requirement has been interpreted inconsistently and the DWP think that other pension professionals may be better placed to offer advice on DC transfers.
The proposal is for trustees to instead seek advice from a ‘suitably qualified professional’. This is a shift from a certification regime to an advisory regime. Trustees must use this advice in exercising their fiduciary duty to act in the best interests of the members. The transferring trustees will not receive a statutory discharge when making such a transfer. Instead they must be able to demonstrate that they have received suitable advice and made sufficient checks to meet their obligations as trustees. The lack of a discharge may be a hotly debated area in the consultation.
If the transfer is to an authorised master trust the trustees do not necessarily have to obtain professional advice. However, while they can assume that the authorisation process covers off some of the areas they should check, others still need to be considered. For example charges and costs, scheme investment strategy and customer service. Trustees are still likely to need appropriate professional advice to cover off these areas.
Suitable qualified professional
In the draft regulations this is defined as a person who the trustees reasonably believe to ‘be qualified by ability in, and practical experience of, financial matters, and to have the appropriate knowledge and experience of the management of the investments of schemes such as the transferring and receiving schemes’. They must also be independent of the receiving scheme. This requires no connection (including having worked for an adviser of that scheme) in the last five years. This seems likely to reduce the number of potential advisers that may be available to trustees and so may be one of the areas amended following consultation.
2) Removal of the scheme relationship condition
Currently the other condition is that transferring and receiving schemes must be connected. The purpose of this is to ensure the members continue to enjoy the support of the scheme sponsor which is important in the context of defined benefit schemes. This is not relevant in the case of a pure DC transfer where member benefits are based solely on the size of a member’s available fund and retirement options.
Therefore the proposal is that this requirement be dropped.
3) Introduction of charge cap protection
This new proposal is simply that where members have been in a fund subject to the charge cap in the transferring scheme they must also be in a charge capped fund in the receiving scheme. This is to protect deferred members who would not otherwise be automatically protected by the charge cap in the default fund of the receiving scheme because it is not being used as a qualifying scheme by the employer.
Trustees who want to make a pure DC bulk transfer without consent in the near future need to consider which regime they would prefer and whether actuarial certification is currently possible, it may not be. They might want to go down this route to obtain a statutory discharge rather than relying on the new advisory process.
Alternatively trustees need to wait for guidance on the new transfer regime that is due to come into effect from 6 April 2018. The Pensions Regulator is expected to be tasked with producing guidance on the new requirements in relation to transfers both to authorised master trusts and other DC schemes.
The consultation closes on 30th November 2017.
The proposals are both practical and helpful and we fully support the intention behind the proposals. There are still a few practical issues and we hope that these will be ironed out during the consultation process.
Disclosing charges, costs and investments to DC membersClick here