From the blog: Pension freedoms, increasing governance demands and higher charges have led to considerable appetite among employers to transfer defined contribution pots to either a mastertrust or contract-based arrangement, but there are a number of hurdles that need to be overcome.
An actuarial certificate is currently still needed to confirm that benefits are no less favourable in the receiving scheme than the transferring scheme.
And if there are deferred members whose pots are being transferred, then the requirement of a scheme relationship to the relevant employer can also be a stumbling block for such transfers.
The certificate must confirm that benefits are no less favourable in the receiving scheme than the transferring scheme
First, the scheme rules should be checked to ensure there is a bulk transfer rule that can be used by the trustees for a group transfer. If there is no such power, an amendment should be introduced allowing bulk transfers without member consent.There are certain statutory requirements that would need to be met for transfers without consent.
One of those requirements is an actuarial certificate. DC schemes do not normally have a scheme actuary, so one would need to be appointed. The certificate must confirm that benefits are no less favourable in the receiving scheme than the transferring scheme.
Certification requirement is more naturally associated with defined benefit schemes, so does not really suit DC-to-DC transfers without consent.
This can make bulk transfers without consent tricky, particularly if there are assurances attached to the DC pot, such as guaranteed annuity rates. If guarantees do exist then consent is required. Due diligence is therefore essential.
Trustees of transferring schemes also need to be satisfied that the transfer is in the members’ best interests, so they should check charging structures, particularly if the employer previously paid expenses. However, members might benefit from greater investment choice and benefit options on retirement.
If there are deferred members whose pots are being transferred, then the requirement of a scheme relationship to the relevant employer can also be a stumbling block for such transfers.
Trustees must decide whether the transfer of the DC pots for active members amounts to a “listed change” and therefore requires consultation over and above the one-month notice requirement for transfers without consent.
Proposed changes
The Department for Work and Pensions recently issued a consultation to say the actuarial certificate would no longer be required in certain circumstances (not including where guarantees are in place) but other governance confirmations and member outcomes might be needed.
Similarly, the DWP is saying that the scheme relationship would no longer be a statutory requirement. However, neither of these proposed changes are yet in force.
If the transferring scheme has contracted-out liabilities to transfer, this can be a problem, as they can only be transferred to a scheme that was also contracted out. The DWP are currently in consultation regarding the removal of this requirement, as all schemes ceased to be contracted out in 2016.
Transferring from a standalone DC scheme to a contract-based arrangement is not permitted without consent. On an individual basis, some HM Revenue & Customs protections would be lost, such as the protected lump sum, which allows members to take a larger tax-free cash lump sum.
Kate Payne is a partner at Arc Pensions Law
