The Financial Conduct Authority has issued a consultation on transfers out of defined benefit schemes, but experts say a disparity between definitions of money purchase benefits could lead to confusion.
The new flexibilities have led to an increase in the number of DB members looking to transfer to defined contribution schemes, but the consultation mandates that members prove they have sought advice before doing so.
The National Association of Pension Funds welcomed the ‘regulatory activity order’, which will regulate those advising on the transfer or conversion of safeguarded pension benefits.
Clearly it’s concerning that the FCA and DWP seem to be reaching a different conclusion on this
Tim Smith, Eversheds
In its response to the consultation, it said: “The NAPF lobbied strongly for this extension to ensure that scheme members moving DB benefits to an occupational DC scheme can be confident that the advice they receive will be regulated and they will have recourse to the FCA.”
Helen Forrest, DB policy lead at the NAPF, also said the FCA was right to release proposed content for an “advice confirmation” letter, to be shown to trustees by a member to prove they have received advice.
“We were very pleased with the FCA coming out and saying what they thought was the appropriate content of an advice letter,” she said, adding it was “likely to establish a common language”.
Definition discrepancies
However, the NAPF questioned the definition of money purchase benefits as laid out by the FCA, which it said differed from that of the Department for Work and Pensions.
“There have been a number of incidents where there have been differences of definition between FCA and DWP guidance,” she said.
The NAPF consultation response said the difference in opinion “would present a number of difficulties”, including creating doubt over what benefits qualify as money purchase.
If benefits offered by a scheme are judged to be DB rather than money purchase they would be subject to differing regulation, and transferring members may be required to take advice.
The FCA said it was unable to comment as the consultation is ongoing. Its response will be published in June.
Tim Smith, senior associate at law firm Eversheds, said multiple statutory definitions for different benefits in different contexts could cause problems.
“Clearly it’s concerning that the FCA and DWP seem to be reaching a different conclusion on this,” he said.
But Matthew Demwell, UK head of member options for consultancy Mercer, said in spite of the confusion schemes should focus on what action they could take to prepare.
“It’s quite important for trustees to focus on the bigger picture; there’s a danger that people can get distracted by some of the details,” he said.
Demwell said the number of members asking for transfer quotes had increased greatly even before the reforms took effect.
Yet many trustees have been waiting for guidance on transfers and have questioned why it has been delayed until after the reforms were rolled out, leaving schemes unsure how to act.
Ben Roe, head of the liability management team for consultancy Aon Hewitt, said: “We’re in a situation where it’s not helpful that there’s a consultation running through June.”
