DB to DC transfers: time for trustees to do more?

When it comes to statutory transfers, trustees can be caught between a rock and a hard place. Once the relevant legal tests are met, trustees are obliged to make the transfer payment.

Guidance makes clear trustees should not second-guess members’ decisions or prevent them making choices the trustees think are unwise.

There are ways for trustees to give financial information without straying into regulated advice

Where due diligence identifies pension scam ‘red flags’, trustees are encouraged to tell the member so they can factor this into their decision. But even where there are no red flags, the decision to move out of DB and into DC may well not be the ‘right’ choice for a member. 

As fiduciaries, trustees have a duty act in the best financial interests of members – so should they be going further to help members make good decisions?   

Information vs advice

For those in the pensions industry, it seems obvious that DB is a valuable benefit. For members, this is not necessarily the case. The lure of a substantial transfer value and the opportunity to take your money as and when you want, is strong. 

It is easy to see why this would appeal – and why the finer detail about investments and preserving the value of your fund can be overshadowed.

The statutory requirements to provide financial information to members are limited. Case law has consistently held that trustees are not under a general duty to communicate with members proactively about financial matters or the relative merits of their options.

Trustees are not authorised to give financial advice and are, quite rightly, cautious to avoid crossing the line between giving information and advice.  

But there are ways for trustees to give financial information without straying into regulated advice. The Financial Conduct Authority recently published a revised draft of its factsheet for trustees and employers on providing support to members in its consultation on pension transfer advice.

The factsheet draws out the distinction between information and advice, and gives examples of the types of support trustees can offer.  

How can trustees help?

A good first step is to review the scheme’s transfer activity. Trustees should ask administrators about the current transfer process and how this is updated to reflect industry best practice.  

• Industry and regulatory guidance. As a minimum, trustees should highlight the availability of free and impartial guidance services, provide the Pensions Regulator’s leaflet on pension scams and (currently) the joint letter about taking a transfer during the Covid-19 pandemic. A number of industry bodies have also produced member guides, which can be enclosed with scheme communications – for example, the consumer guide on the Pension Transfer Gold Standard. 

• Communications. Many pension schemes still rely on hard copy letters as the primary means of communication. During the current crisis, trustees and administrators have had to reconsider when and how to communicate with members in the short term. This could be a golden opportunity to think about the trustees’ communications strategy more generally. Is the current format working? Could technology improve member engagement? Are communications targeted to your membership? 

• Education and support. Trustees are in a good position to be a trusted source of information. Trustees (and employers) should consider whether to offer basic financial education about pensions, investments and the impact of costs and charges as well as scheme benefits. This could be delivered by way of webinar, online tools and/or a helpline. Trustees don’t necessarily need to appoint a specialist provider or incur significant cost, what will be appropriate will depend on the scheme and the membership.

• Regulated financial advice. Regulators remain concerned about the suitability and quality of pension transfer advice and the difficulty of choosing a financial adviser. The introduction of a ban on contingent charging from October 1 2020 is helpful, but may in practice widen the gap further for members who cannot afford to pay the one-off cost of financial advice. Trustees and employers should consider whether to appoint one or more preferred financial advisers and/or to help meet the cost of taking advice. It may be possible, for example, to provide abridged advice through the scheme. This approach will not be without risk, and trustees should take legal advice on how to manage such risks in practice.  

Kirsty Pake is a senior associate at Sackers