Trafalgar House's Michael De Souza discusses pension scheme trustees' main responsibilities with regard to defined benefit transfers.
Action points
Establish and communicate a policy for non-statutory transfers
Review administrator processes for validating transfers and any associated advice
Review member communications to ensure they are clear and inform about the risks of pension scams
What is most problematic about this statistic is that DB transfers are one of the most complex and high-risk transactions for a pension scheme.
Entitlement to transfer
The first stage in any transfer process is establishing the member’s eligibility to apply for a transfer.
Even where a member has taken suitably authorised advice from an FCA regulated adviser, trustees are still accountable for checking the legitimacy of a receiving arrangement
Legislation affords DB members a statutory right to a transfer where they have ceased accrual, made an application to transfer benefits following receipt of their statement of entitlement, and have made that application at least one year before their scheme’s normal pension age.
The statutory right gives members the option to request a cash equivalent transfer value once in every 12-month period.
It is commonplace for schemes to offer transfer rights that go beyond the statutory requirement, either allowing members to transfer in the period directly before retirement or to receive more than one cash equivalent value a year.
This option depends on each scheme’s trust deed and rules, which must be checked and established before members are given additional non-statutory transfer rights.
Requirement to take appropriate independent advice
The Pension Schemes Act 2015 introduced new concepts and terminology to classify different types of transfer. Most notably, it introduced the concept of ‘flexible’ and ‘safeguarded’ benefits, with flexible benefits being principally money purchase and cash balance schemes and ‘safeguarded’ benefits everything else (including DB).
The 2015 act requires that a transfer of safeguarded benefits to acquire flexible benefits is subject to the member obtaining appropriate independent advice if the cash equivalent transfer value is greater than £30,000.
This piece of legislation can be confusing for trustees, who often believe they need to interrogate or agree with advice given.
Trustees are in no way required to check advice and recommendations, even if members have followed them. They need only check that a suitably qualified person gave advice on the transfer. To achieve this, trustees should obtain a copy of the adviser’s confirmation to the member confirming:
that advice given specifically relates to this DB to DC transfer;
that the adviser in question is authorised to advise on DB transfers;
the references of the business the adviser works for; and
the name of the member to whom the advice relates.
Trustees must keep a copy of this notice, but they need not dig any deeper to understand what the advice was. In fact, members are still entitled to proceed with their transfer of safeguarded benefits even if the advice says otherwise.
Once the confirmation statement has been received, duty then falls back on trustees to check the adviser has the correct authorisations before a transfer is made. This can easily be done by using the Financial Services Register, maintained online by the Financial Conduct Authority.
Trustees should also maintain a record of all checks performed on the adviser’s status, including who performed the check, when it was undertaken and evidence of the adviser’s authorised status.
Establishing the status of the receiving scheme
Even where a member has taken suitably authorised advice from an FCA regulated adviser, trustees are still accountable for checking the legitimacy of a receiving arrangement.
This is a complex task and the process can vary from administrator to administrator. The level of due diligence undertaken is broadly based on the type of receiving scheme that the transfer is being paid to. Risk indicators, as well as knowledge of the receiving administrator are two of the most common approaches to obtaining an initial indicator.
Communication is not only an essential part of educating members about the potential risks of transfers, but is also a duty placed on trustees as part of their disclosure obligations.
Members should be made aware of the time limits that apply to making a transfer application so that they do not lose out on any statutory transfer rights. They must also be given information about how to avoid pension scams.
Michael De Souza is technical and compliance manager at Trafalgar House
