Looks at the requirement to take advice for pension scheme members seeking to transfer or convert 'safeguarded benefits' (such as defined benefits) worth more than £30,000 into 'flexible benefits'
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The pension freedoms
The ‘pension freedoms’ introduced in April 2015 gave people aged 55 and over more flexibility about when and how to draw their defined contribution (DC) pension savings.
As the Money Advice Service explains, with a DC pension “you build up a pot of money that you can then use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income, the income you might get from a defined contribution scheme depends on factors including the amount you pay in, the fund’s investment performance and the choices you make at retirement.”
Before the reforms, most people had had to buy an annuity with their DC pension savings. Annuities have the advantage of providing a guaranteed income throughout retirement. However, they became less popular as annuity rates fell, and many consumers did not feel they offered sufficiently good value for money to justify the effort of shopping around.
DB transfer rights
The pension freedoms were not aimed at members of defined benefit (DB) pension schemes (which provide benefits based on salary and length of service) for the majority of whom, it was likely to be in their best financial interests to remain in their DB scheme.
However, they may have the right to transfer their benefits to another scheme. The Government recognised that the pension freedoms might make transfers from DB to DC schemes more attractive. It considered removing this right (Cm 8835, March 2014, para 5.15). Following consultation, it decided to maintain transfer rights for members of private sector DB schemes and funded public sector schemes (principally, the Local Government Pension Scheme).
However, it decided to require those with benefits worth over £30,000 seeking to transfer or convert those benefits into DC benefits to take independent advice first. The intention was to ensure they were aware of the security and valuable guarantees they would be giving up (Cm 8901, July 2014, chapter 4; Pension Schemes Act 2015 (s48); SI 2015/742, reg 5). The ‘advice requirement’ applies to people with ‘safeguarded benefits’ worth over £30,000, who are seeking to transfer or convert them into flexible benefits. ‘Safeguarded benefits’ means not only rights in a DB scheme, but also any benefits which include some form of guarantee or promise to members, when they are building up their pension rights, about the rate of secure income they can expect when they come to draw them (TPR guidance, DB to DC transfers and conversions, updated Jan 2020).
The number of transfers from DB into DC pensions has risen steadily since the introduction of pension freedoms. The Financial Conduct Authority has expressed repeated concerns at the quality of advice in this area. It has “found advice was suitable in fewer than 50% of cases; this was not acceptable, and standards must be improved.” Despite its guidance that advisers should start from the position that a transfer is unlikely to be suitable, almost seven in ten (69%) of those advising on a transfer between April 2015 and September 2018 recommended a transfer (DB pension transfers: market wide data results, FCA, July 2019). On 21 January 2020, the FCA said too much advice was still not of an acceptable standard and that it would step up its supervisory activities in this area over the next two years. The issues around DB pension transfer advice are discussed in a separate note Pension transfer advice (CBP 8488, May 2020).
In March 2020, the Pensions Regulator said that due to the Coronavirus outbreak, DB schemes would be allowed to suspend providing Cash Equivalent Transfer Values for a period of three months. This was to allow them to check the terms they were offering, in light of changes in the economy and financial markets, and to protect administrative functions from potentially being overwhelmed. It also issued guidance on communications to members – stressing the risk of scams and that DB to DC transfers are unlikely to be in the scheme member’s best long-term interests. Trustees were asked to monitor transfer requests and report concerns (TPR, DB scheme funding and investment: COVID19 guidance for trustees, March 2020; TPR, Communicating to members, 29 April 2020).
Public sector pensions
When it introduced the pension freedoms, the Coalition Government decided to prohibit members of the main public service pension schemes, except for the Local Government Pension Scheme (LGPS) from transferring out to a DC scheme. This was because of concern about cost to the Exchequer if significant numbers of public servants asked for their pension rights to be paid in a lump sum rather than over many years (CM 8835, March 2014, chapter 5; Pension Schemes Act 2015 s68). Concerns have been raised about people transferring-out rights in public service pensions schemes before this ban was put in place (PQ 184, 21 October 2019).
The support provided to British Steel Pension Scheme members during the ‘time to choose’ exercise is discussed in more detail in Library Briefing Paper CBP 8288.