The introduction of the new pension flexibilities in 2015 shone the spotlight on DB to DC transfers. With greater choice for pension savers, came worries about how to protect them. The lure of a quick and easy cash pay-out tempting some to give up their ‘gold-plated’ DB pensions in favour of higher-risk and potentially lower value DC arrangements. Weighing up the potential costs and benefits of DB to DC transfers has been a key area of debate.
Government policy has clearly taken a line in favour of savers’ freedom of choice – as Steve Webb, the pensions minister who introduced the changes put it, “if people do get a Lamborghini, and end up on the State pension… that is their choice.” However, the Government hasn’t left savers completely unprotected, introducing requirements for mandatory financial advice for larger transfers and introducing Pensionwise, a free guidance service for DC savers approaching retirement.
While most schemes have seen an increase in DB to DC transfers, it has become clear that there has not been the deluge anticipated by some commentators. Most DB pension scheme members seem to be content to keep their pensions in place, despite the temptations of DC flexibilities.
Of course, this may change in the future. The proposed introduction of a secondary market in annuities is likely to make DC pensions all the more attractive. Another major driver of future increases may well be new products and increased marketing as the flexibilities bed in and pensions providers seek to capture new markets. Counteracting that, there is the possibility of Government action to increase protections for savers, leading to a fall in transfers. A pensions mis-selling scandal and/or increasing education and concerns about pensions scams could also reduce the appetite of savers to take a transfer, as well as increasing the chances of intervention.
DB to DC transfers – what are the restrictions?
The current restrictions on savers making DB to DC transfers are in some ways relatively limited. For a saver to have the right to transfer, they need to fulfil the requirements for a statutory transfer (these can be briefly summarised as: (i) being at least a year from retirement age; (ii) making a transfer to a registered personal or occupational pension scheme or a qualifying overseas scheme; and (iii) for a transfer to an occupational pension scheme, being an earner under the scheme’s provisions). If a saver’s DB pension is worth more than £30,000, they must also provide evidence that they have received appropriate independent advice in relation to the transfer.
However, where an IFA has advised a saver in relation to a proposed DB to DC transfer, the trustees of the transferring scheme are under no obligation to check the content of that advice or whether the saver is acting in accordance with it.
Additionally, the Pensions Ombudsman and the High Court have been clear in past cases brought by pension scheme members wishing to transfer their benefits out of DB schemes that, where a case meets the requirements for a statutory transfer, pension scheme trustees may not unduly delay or refuse that transfer, no matter how suspicious they might be about it. So even if the scheme trustees do check the IFA’s report, there is little they can do to prevent an insistent member from transferring their benefits, however much the trustees (along with the saver’s IFA) might think that it is a mistake.
Safe from scams?
In addition to the risks of savers making a bad financial decision, pensions scams are also a significant source of concern and we have seen a definite rise in legal advice being sought in relation to suspicious member transfer requests. These scams have received a considerable amount of attention from the Pensions Regulator and, when dealing with transfers from DB to DC pension schemes, trustees will almost always have them in mind.
There are of course some protections aimed at preventing scams. The Pensions Regulator’s current action pack on scams sets out a checklist of actions for trustees (such as checking HMRC registration or FCA approval and reviewing the promotional material for the receiving scheme). Well-run schemes should also be providing members with information sheets on the potential for pension scams when they make transfer quotation requests. That said, there appears to be an increasing level of sophistication from arrangements attempting to part DB members from their pensions, many of which seem to have taken legal advice to ensure that they meet the requirements for a statutory transfer of members’ benefits.
Even though these arrangements are often obviously artificial in nature, with members’ ‘employers’ being recently established companies with no clear business activity, they meet the letter of the requirements for a statutory transfer, making it very difficult to protect savers from them. In these cases, a saver’s IFA will often be central to ensuring that they do not make a poor decision to transfer their DB pension and IFAs’ awareness of the risks to savers will be key to protecting them.
Increased saver protection – who bears the burden?
While there are weaknesses in protections for savers, which can make dealing with scams much more difficult, it is questionable whether those protections should be reinforced. Any new restrictions on transfers could risk depriving savers of the right to deal with their pension as they see fit, potentially impacting on pension saving rates and very likely being unpopular among those affected. Any new protections would probably have to place additional responsibility on the shoulders of pension scheme trustees or IFAs. For example, by giving trustees the power to reject transfers in certain circumstances or requiring that savers follow the IFA’s advice.
Any increased IFA involvement in the transfer process increases the risk for IFAs if a saver later decided it had been a bad decision to make a transfer and, arguably, any potential future mis-selling scandal would be focussed on IFA advice. On the other hand, many trustees would certainly be very reluctant to take on the added burden of making active decisions in relation to transfer requests, given the risk of claims and general lack of financial expertise of many trustee boards. Paying for external advice each time a transfer is requested could be a significant drain on a pension scheme’s resources.
Therefore, any increase in protections for savers is likely to make life more difficult for IFAs and trustees and increase the odds that dissatisfied savers will complain about transfers being refused, or about losses resulting from a transfer that was accepted. Given the existing requirements for transfers and the information on scams that must be presented to savers requesting transfers, it is questionable whether any additional protections are actually needed. Where a saver insists that they want to make a transfer, has been given every possible warning, and there is no direct evidence of a scam, there must come a point where the choice is theirs to make?
