Pensions Alert UK: April 2015 reforms: Final regulations made

by DLA Piper

The introduction of the DC flexibilities announced in last year’s Budget is now only a matter of days away, and in recent weeks various sets of regulations have been made in final form which will come into force on 6 April 2015. Some of these regulations add detail to provisions in the Taxation of Pensions Act 2014 and the Pension Schemes Act 2015, while others make amendments to existing pensions legislation to give effect to the reforms. In this Pensions Alert we provide an overview of the key regulations, with particular focus on DB to DC transfers, and the introduction of a statutory modification power.

DB to DC transfers

Whilst DB members will not be able to access the new flexibilities directly, they will be permitted (aside from members of unfunded public service schemes) to transfer their benefits to another scheme in order to do so. However, this will be subject to safeguards in the form of an advice requirement and updated guidance for DB scheme trustees from the Pensions Regulator.

Where a member or survivor has subsisting rights in respect of "safeguarded benefits" (that is, defined benefits) and wants to convert those benefits into flexible benefits (that is essentially, money purchase or cash balance benefits) or make a transfer with a view to acquiring a right to flexible benefits under another scheme, the Pension Schemes Act 2015 requires trustees to check that the person has received "appropriate independent advice" before making such a transfer. Regulations have been made providing further detail about this advice requirement. The Regulator has also published draft guidance on DB to DC transfers for consultation, and the final form is awaited.

When does the requirement apply?

The requirement applies whether the person has a statutory right to transfer or is making a transfer under the scheme rules, and also applies to transfers to a different scheme or to a different section of the same scheme.

The only exception is where the cash equivalent value of the person's DB rights under the scheme is £30,000 or less.

Providing information to members

Generally, trustees will have to provide information to members or survivors explaining the requirement to take appropriate independent advice:

  • within one month of the person making certain initial enquiries about transfers;
  • if the trustees are required to provide a statement of entitlement, on the same day as doing so; and 
  • if the trustees are not required to provide a statement of entitlement, on the same day as providing confirmation that the trustees agree in principle to carry out a transfer, or have made an offer of a transfer.

There are some exceptions so that if the value of the benefits is £30,000 or less the trustees simply have to provide written confirmation that they do not need to check that advice has been received before making the transfer. Other exceptions are designed to prevent duplication of information and cases where the advice has already been received.

The advice

The member will essentially have three months in which to confirm that they have received appropriate independent advice. The advice must be specific to the type of transaction proposed and must be given by an independent adviser authorised to do so. (Separate regulations have created a new regulated activity for advice on these conversions and transfers.)

The member does not need to provide the trustees with a copy of the advice, but with a statement in writing confirming specified matters including that advice has been provided, that the adviser has the relevant regulatory permission, and the firm reference number of the relevant company or business in which the adviser works.

What checks do trustees need to complete?

The legislation simply requires trustees to check that the company or business has the relevant permission to give advice by checking the Financial Services Register maintained by the FCA. The Regulator suggests in its draft guidance that it would be sensible for trustees to undertake additional periodic checks of advisers. However, the Regulator also makes it clear in its draft guidance that trustees are not responsible for checking what advice was given, what recommendation was made or for confirming whether the member is following that recommendation.

What about the time limits to pay transfers?

Statutory transfers generally have to be made within six months but an exception is created for cases where advice has not been received or the trustees have not been able to carry out the check due to factors outside their control. In addition, a statutory power of amendment is being introduced so that trustees can, by resolution, modify their scheme rules so that in these circumstances they are not required to make a transfer pursuant to a right in the scheme rules.

Who pays for the advice?

The general position is that the member pays for the advice, but the legislation requires the employer to do so where it has sent a communication to two or more members or survivors setting out their options in terms that encourage, persuade or induce them to request a transfer or conversion of their benefits. Provision is also made so that if the employer is required to pay for the advice, it will, (subject to an exception for salary sacrifice arrangements), be exempt from income tax for the employee and neither will there be an NIC liability for the employer or, if applicable, the employee.

Other issues for trustees to consider

The Regulator's draft guidance also states that it will be important for trustees to monitor and understand demand from members for transfers and the subsequent impact those transfers could have on scheme funding, and to monitor the potential impact on investments.

What about transfers in the process of being dealt with?

There are transitional provisions so that essentially the requirements will not apply to transfer payments made on or after 6 April 2015 where the payment is a result of the member exercising the right to a cash equivalent, and the application for a statement of entitlement was made before 6 April 2015, or where an agreement in principle was given or an offer of a transfer payment was made before 6 April 2015.

Action points

Trustees will need to liaise with their administrators to ensure that the scheme's transfer processes are updated in order to comply with the new requirements.

Statutory modification power

If employers and trustees want to offer the new flexibilities from April 2015, they could make scheme rule amendments in the usual way to reflect this. There is also a power in the Taxation of Pensions Act 2014 which permits trustees to pay certain benefits under the new flexibilities even if the scheme rules prohibit this.

A further option has now been introduced by regulations in the form of a power for trustees to modify the rules, with employer consent, by resolution for the purpose of offering certain benefits under the new flexibilities. The regulations provide a full list of these payments but they essentially cover drawdown and the new uncrystallised funds pension lump sums. The modifications made under this power can include the imposition of conditions, such as payment of a fee, on certain payments.

Where schemes are intending to offer the new flexibilities, it will need to be considered which power to rely on to do so. The advantage of making rule amendments (whether under the scheme power of amendment or the resolution-making power) is that it will be clear what benefits are being offered and in what circumstances and whether there are any conditions to the payments being made.

Other regulations

  • Amendments have been made to the Disclosure Regulations to introduce new requirements in relation to members with flexible benefits, and to ensure that the Pension Wise service is signposted to members. Further detail can be found in our recent Pensions Alert.
  • Consequential amendments have been made to regulations about scheme transfers to reflect the fact that the statutory right to transfers will now operate at a benefit category level. 
  • Reporting requirements have been updated to reflect the changes to the taxation of death benefits which allow certain payments to be made tax free. 
  • Provision has been made to remove the scope for members to take unintended advantage of the new flexibilities on annuities by transferring an old annuity to one issued on or after 6 April 2015.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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