There is no obligation to adopt the range of flexibilities offered by pension freedom – DLA Piper's Ben Miller looks at what trustees need to consider before amending their schemes.
Employers and trustees are still trying to get to grips with how best to implement the changes and understand how the market will react to cater for them.
Members similarly are faced with confusion around what they are entitled to under the new legislative provisions.
The flexibilities mean that members with money purchase benefits may be able to choose whether to:
withdraw income from their fund and leave the rest invested using flexible drawdown;
take their benefits as a one-off lump sum, or a series of smaller lump sums as and when the member wants, notwithstanding tax charges;
buy a lifetime annuity in the insurance market; or
take a scheme pension.
One of the main areas of confusion to members is that these flexibilities will largely depend on whether individual pension schemes choose to adopt them.
Trustees and employers will need to consider which of the above options they want to allow.
If schemes do not want to offer some or all of those options, members with money purchase benefits will be able to transfer their benefits to another arrangement, where these flexibilities can be accessed.
A balance must be struck so that it is not seen as any kind of encouragement to transfer or to elect for any particular flexibility
Trustees and providers of money purchase schemes will be required to inform members about their options to access their funds, including the member’s right to transfer to another arrangement.
It is strongly recommended that such information should be detailed enough to satisfy this requirement, but a balance must be struck so that it is not seen as any kind of encouragement to transfer or elect for any particular flexibility.
Trustees should take advice on how best to strike this balance.
Permissive override
This override allows trustees and scheme administrators to grant access to the flexibilities to members, without amending the scheme rules.
While this may be useful in the short term, rules and member literature should be updated as soon as possible to reflect the revised benefit structure.
This not only educates members, but also reduces the risk of maladministration arising from outdated rules and literature.
It is important to note that this is a power for trustees and scheme administrators, not an obligation.
Whether members are granted access to the new flexibilities – outside of what the scheme rules allow – is at the discretion of the trustees and scheme administrators.
While the permissive override is granted to trustees and scheme administrators, care needs to be taken to engage with employers so the interaction of benefits provided are understood and complement employers’ remuneration strategies and literature.
DB-DC transfers
Schemes may receive an influx of queries and requests from defined benefit members who want to access the new flexibilities.
Members can do this by transferring their benefits to a money purchase arrangement.
Legislation prevents DB members from transferring if they are within a year of normal pension age – meaning such a transfer would need to be done under the scheme rules, which may need to be amended to include a non-statutory transfer rule.
Trustees should proceed with caution where a member requests a transfer of their DB benefits and should establish a robust transfer process to comply with the new legislative requirement to provide independent financial advice.
In addition, it is important that trustees ensure the receiving scheme is not part of a pension scam and that they receive an express discharge from the member where a non-statutory transfer is permitted.
A watching brief should be kept on the number of transfer requests relating to DB benefits, as a marked increase in transfers out could affect scheme funding.
The new flexibilities should not present as many drastic changes as may first have been feared, but schemes should be prepared to decide which of the flexibilities to offer members and then align documentation with those changes sooner rather than later.
Ben Miller is a partner in the employment practice at DLA Piper
