This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
With almost all the legislation and regulatory guidance in place, trustees and employers will by now have decided what policies they wish to adopt in relation to the new flexibilities. It is vital that you now ensure that your documentation and procedures comply with the new statutory and regulatory regime.
Areas that will require particular attention and updating are transfer processes and member communications. Although the new flexible benefit options apply only to money purchase and cash-balance benefits (DC) there has, as expected, been an increased demand for transfer information from members with defined benefits (DB) who are considering transferring to a DC arrangement in order to access their cash.
Transfers: new statutory rights and procedures
|Transfers: a quick reminder
Members haveseparate transferrights for different categories of benefit.
Appropriate independent advice must be obtained prior to a DB transfer.
Trustees must ensure Pension Wise signposting for DC transfers.
Trustees must carry out due diligence against pensions liberation.
Trustees should considerinvestments to ensure adequateliquidity to cope with increased transfer demands.
Trustees should consider reviewing assumptions used when calculating DB transfer values.
Members now have separate statutory transfer rights in relation to benefits held in each of three categories:
- money purchase benefits;
- cash balance benefits; and
This means that members with DC AVCs within a DB scheme now have the right to transfer their AVCs to another arrangement (in order to access them) while still retaining their DB benefits in the scheme. Trustees will need to identify which category of benefit each member holds, as the new transfer requirements are slightly different in relation to each one.
A fundamental change is the requirement that members must take regulated independent advice before transferring a DB benefit into a flexible benefit arrangement (unless the member's total DB benefits in the scheme are valued at £30,000 or less). Trustees need to make specific checks to ensure the appropriate advice has been given (although they should not ask for details of what the advice was).
Where a transfer request relates to DC benefits then the trustees are required to point the member in the direction of Pension Wise to encourage them to seek guidance on what options they have.
Beside the new statutory requirements sits new guidance from the Pensions Regulator which includes encouragement to trustees to issue a final risk warning to the member before any payment is actually made. There is also a voluntary industry code of practice on combating pension liberation scams. The code sets out detailed due diligence steps trustees should take in order to protect members from transferring to liberation arrangements.
The new regime is likely to trigger increased demand for transfer payments. Trustees should be monitoring this and ensuring that they hold appropriate assets to enable them to make transfer payments within the statutory timeframe. Trustees of DB schemes should consider reviewing their statement of investment principles, and those of DC schemes should keep the investment options under review, to ensure they remain appropriate for the members (particularly any life-styling funds targeting annuity purchase on retirement). Trustees of DB schemes should also monitor the level of transfers and how this might affect the funding position of the scheme and consider reviewing the assumptions used when calculating transfer values (taking actuarial advice as appropriate).
Transfers: how Nabarro can help
We have produced a guide on DB transfers. This sets out the essential steps together with disclosure and communication requirements. We can also assist in:
- reviewing your transfer communication materials to ensure that they comply with the new regulations;
- advising on a review of your statement of investment principles;
- advising on due diligence issues; and
- advising on and drafting scheme amendments to reflect the changes.
DC benefits: flexibilities and communication
|DC benefits: a quick reminder
New requirement for trustees tosignpost thePension Wise guidance service.
Schemes can offer newlump sum or flexible drawdown options.
Permissive override givesdiscretion for trustees to pay flexible benefits.
Trustees should review the investment options.
A major new requirement is to signpost members to Pension Wise. Very broadly, trustees must inform the member of his right to obtain guidance in order to assist him in making decisions about his flexible benefits. The requirement to provide the information is triggered by a member request for information about his benefits (including by telephone) or when a member is approaching retirement age. Member communications and pre-retirement packs will need updating to take this into account as well as to detail changes in transfer rights and any new benefit options available.
The new flexibilities enable schemes with DC benefits to offer members a wider range of options, including unrestricted cash lump sums and flexible drawdown. Trustees, in consultation with the employer, should decide what, if any, new benefit options they wish to provide and communicate this to the members. In our experience, few occupational schemes are offering these (with the exception of the option to take the entire benefit as a one-off lump sum). However, the new statutory transfer rules make it easier for members to transfer their DC benefits to another arrangement that does offer the flexibilities they desire.
Included in the new flexible benefit regime is a "permissive override" which gives trustees the discretion to pay a flexible DC benefit even where it is not expressly offered under the scheme rules. This means that trustees could be placed in a position of having to at least consider making such a payment where requested by a member, even if the trustees and employer have decided that this was not a benefit that would routinely be offered by the scheme. Therefore, where trustees have adopted a policy (which may be reflected under the scheme rules or as set out in announcements to members or as agreed with the employer), as a result of the permissive override, trustees should at least be open to considering requests from members for an alternative benefit on a case-by-case basis. Generally cost or administrative complexity may provide a reasonable basis for not moving away from the established policy.
Trustees should also be considering the investment offering. This is particularly relevant to lifestyle funds where assets are moved into gilts and bonds in the period before retirement. This strategy may no longer be appropriate for members who intend to take lump sum benefits rather than purchase an annuity.
DC benefits: how Nabarro can help
We have produced an updated guide on disclosure in relation to DC benefits. This sets out the main disclosure and communication requirements. We are also able to:
- assist in drafting a policy on flexible benefits and the permissive override;
- review scheme booklets, pre-retirement packs and other communication materials to ensure compliance with the new regulatory requirements; and
- advise on and draft scheme amendments to reflect any changes.