Pensions flexibility - more detail emerges

The DWP has unveiled draft regulations which provide more detail about how trustees will need to operate their schemes from 6 April in the light of the new flexible defined contribution benefits. Although the regulations are not final, the Government has released them now in order to allow the pensions industry additional planning time in the run-up to 6 April. It does, however, emphasise that the regulations are still subject to final legal checks, and to Parliamentary approval in early March.

Disclosure

The main changes are in the information that trustees need to provide to members under the Disclosure Regulations.

Members with DC benefits will generally need to be given the following information where they are approaching retirement age:

• the options available to them under the scheme rules;
• that they have an opportunity to transfer their benefits;
• a statement that different pension providers offer different options in relation to what they can do with flexible benefits, including the option to select an annuity;
• that different options have different features, different rates of payment, different charges and different tax implications; and
• a copy of guidance that explains the features of the possible options, prepared or approved by the Regulator; or a statement that gives materially the same information.

There are also additional requirements to direct members to guidance on the flexible benefit options which might be available to them and tell them they should consider taking independent advice to help them decide which option is most suitable for them.

Trustees will need to review their pre-retirement communications to members with DC benefits and ensure that they comply with the new requirements. In addition, where trustees are making any changes to scheme rules to accommodate the new DC flexibilities, they will also need to consider whether the Disclosure Regulations require them to notify members about such changes.

The basic information that members need to be given will need to be altered to reflect the new transfer provisions. Members with DC benefits will need to be told that their right to a transfer payment in respect of those benefits will extend up to the point at which they take their benefits from the scheme. Members with DB benefits will need to be told that they may be required to take independent financial advice before transferring their benefits to a DC arrangement (or converting them to DC benefits). Trustees should consider whether they need to send an update of the information previously given to members in order to reflect these changes.

Resolution making power

A separate set of regulations will give trustees a power to amend the scheme rules by resolution, with the consent of the employer, to provide the new DC flexible benefits.

The Taxation of Pensions Act 2014 also contains a provision allowing trustees to pay out flexible benefits, irrespective of anything to the contrary in their scheme rules. Therefore, even where no resolution is made, it would seem that trustees can consider individual member requests for flexible benefits. However, where consideration is being given to including flexible benefits in the scheme design, amendments should be made to the scheme rules in due course and use of the resolution making power should be considered.

What next?

The draft DWP regulations can be found here.

As noted above, the final versions will not be in place until early March, by which time the Pension Schemes Act 2015 should have received Royal Assent. In any event, there is still more to come on the introduction of DC flexibility and its impact on both DB and DC transfers. In particular, we have not yet seen the expected draft regulations which will provide more detail on the requirement to take appropriate independent financial advice where members are seeking to transfer their DB benefits to a DC arrangement or convert them to DC benefits within their existing arrangement.

In the meantime, the Government has set up the new Pension Wise website which will contain the guidance that members need to be given. There will also be standard communications that trustees can use to signpost members to Pension Wise, in accordance with the new Disclosure Regulations. Further Pensions Regulator guidance on the disclosure requirements is expected next month.