The industry has welcomed the pensions watchdog’s clarification on trustees’ duties around the new flexibilities, but some are concerned scheme administrators will face capacity issues around rising transfer value requests.
The Pensions Regulator’s long-awaited guidance published last week provided further detail on the role of trustees in informing and protecting members in how to make use of the full retirement flexibilities available from April.
Key points from the regulator
Trustees will be expected to provide members with the information needed to allow them to make "informed decisions about their retirement planning".
Guidance or advice will be delivered solely by an independent adviser authorised by the Financial Conduct Authority.
Trustees do not have to check what advice was given, what recommendation was made or whether the member plans to follow advice, but must ensure the member has provided the scheme with signed confirmation from their adviser complete with that adviser's FCA registration number.
Proper due diligence must still be conducted on the receiving scheme by trustees prior to any transfer to ensure that it is a legitimate arrangement.
If there are any doubts the regulator will call upon schemes to seek further guidance.
Source: The Pensions Regulator
Trustees have been relieved of any perceived duty to “second-guess” member choices and are bound only to ensure members receive information and that they take independent financial advice when transferring substantial sums out of defined benefit schemes.
Industry experts are uncertain about how many transfer requests will be received in April, but expect pressure on administrators to ramp up significantly. Helen Powell, professional support lawyer at law firm Allen & Overy, said even if ultimately members do not choose to transfer out, a higher proportion are likely to ask what their transfer value would be.
“For some schemes that’s quite a complicated manual calculation, for others it’s automated and quite simple – trustees need to think… how difficult is it going to be to provide transfer quotes for the proportion of members who might ask for them?” she said.
Allan Course, client director at professional trustee provider Capital Cranfield, said: “No one knows what’s going to happen, we’re sitting and waiting to see what happens. If there is a surge, schemes may have to try and recruit fast.”
In order to deal with increasing pressures, schemes are encouraged to review the efficiency of systems and processes they currently have in place. Course said it was important for trustees to make sure that transfer value bases in place are fit for purpose.
“Trustees should look at that periodically – good practice is at least once a year – to make sure it doesn’t put too much of a strain on the funding of the scheme as a whole,” he said.
Jeremy Goodwin, partner at law firm Eversheds, said trustees need to be aware of the potential impact of outgoing transfers on schemes’ investment profile and funding position. “Trustees have a duty to both transferring members and members staying behind,” said Goodwin.
Countdown to April
The regulator has also laid out a series of timelines detailing the protocols DB trustees need to implement ahead of April in order to both process transfer requests and protect the funding position for remaining members.
Paul Darlow, head of proposition development at Xafinity, said the consultation was helpful in clarifying what schemes do not need to know, and removing the “grey areas” and concerns for trustees.
“The most important thing to emphasise to members is that they have a range of options that… come with advantages and disadvantages. Transfers out of DB arrangements have some potentially serious downsides for many people,” he said.
The guidance also cleared up widespread concerns about how trustees should respond to members who actively disregard financial advice.
“Trustees will not have to second-guess member choices, which is good news,” said Powell. “Trustees are expected to conduct due diligence about the receiving scheme and I think that’s going to be an area we’re going to hear a lot more about,” she said.
