Proposed changes to FCA transfer rules – Sackers’ response to consultation

Background

On 4 March 2015, the FCA published a consultation on proposed changes to its pension transfer rules that are designed to support the new flexible pensions regime which came into force on 6 April 2015.

The new regime brings advice on the conversion or transfer of “safeguarded benefits” to flexible benefits within the FCA’s remit.  The consultation therefore looks at how the FCA will amend its rules to incorporate this new “specified activity”.

In this response

• General comments
• Adviser qualification
• Pension transfer definition
• Pension conversion definition
• Guaranteed annuity rates
• Pension transfers for the purpose of crystallising benefits
• Next steps

General comments

We welcome the opportunity to comment on the FCA’s proposals for new rules on pension transfers.  In general, we support these proposals, which seek to ensure that pension scheme members who are contemplating a transfer or conversion of their safeguarded benefits.

Our specific comments on the FCA’s proposals are set out below.

Adviser qualification

Since the 2014 Budget, significant interest has been generated in relation the new flexible benefit options now available to members.  However, there has been somewhat less focus on the potential risks for members with safeguarded members, who may now consider converting or transferring their benefits in order to take advantage of the new options.

To this end, it is key that advice for affected members is properly regulated and we therefore agree that the advice under the new specified activity should be provided by, or checked by, a Pension Transfer Specialist.

Pension transfer definition

The proposed new definition of pension transfers, including the requirement for a transfer value analysis, appears to be a sensible approach.

The consultation asks whether the FCA should continue to include transfers from occupational DC schemes without safeguards in its definition of “pension transfer”.  We agree with the FCA’s comments that “there may still be non-safeguarded benefits that need to be assessed in any trade off” and that “a Pensions Transfer Specialist is more likely to be able to recognise pension scams and investment scams”.[1]  We therefore also agree with the proposal that such transactions should not be excluded from the definition of “pension transfer”.

As the consultation goes on to note, it is difficult at this stage to judge the likely take-up of the new option to convert or transfer safeguarded benefits into flexible benefits.  This is something which will be monitored closely and with interest by the FCA and others in the pensions industry.  We consider that it will be important to keep a watching brief on the market as it develops, with a view to extending protections for members as required.  We do not see any merit, at least at this stage, in removing any of the existing safeguards.

[1]At paragraph 2.17

Pension conversion definition

As the FCA notes, “conversions of safeguarded benefits into flexible benefits within the same scheme are currently very rare”.  In principle, we agree with this statement, and are of the view that the majority of members with flexible benefits are likely to want to retain these.

However, many schemes which currently provide safeguarded benefits are hybrid in nature, for example schemes which provide DB benefits and DC AVCs, or those which offer DC benefits under a separate DC section within the same scheme.  It would therefore be reasonable to expect greater interest in conversions in such schemes, and it will therefore be very important to include the conversion of safeguarded benefits into flexible benefits within the same scheme within the definition of “pension conversion”, as proposed.

We also agree that payments of UFPLSs in respect of safeguarded benefits should be included within this definition.

Guaranteed annuity rates

We have some concerns in connection with the FCA’s interpretation of GAR policies, as set out at paragraphs 2.28 to 2.31 of the consultation document.

We note the FCA’s policy intention that pension scheme members who benefit from GARs should not be excluded from the requirement for trustees to check that a member has received appropriate independent advice under s.48 Pension Scheme Act 2015.  That said, we believe that there is a risk of the FCA’s statements in this section causing confusion as to whether or not the requirement applies.

In connection with the new definition of “money purchase benefits” in the Pension Schemes Act 1993 (to reclassify DC benefits following the July 2011 decision of the Supreme Court in the Bridge Trustees case), our understanding, following discussions with the DWP in 2014, in relation to occupational pension schemes is that:

• where a GAR is promised under the rules of an occupational pension scheme, the benefit is notmoney purchase; but
• where it is not in the scheme rules, and the member’s right under the scheme rules is to whatever can be provided from their pot at retirement (with no promise as to what that might be) and the GAR is contained in in an insurance policy held by the trustees of the scheme through which contributions are invested, or the right is referred to in the scheme rules but is subject to a restriction such that the member will receive only what is payable under the insurance policy, the GAR will not cause the benefit to cease being money purchase.

We would therefore welcome clarification that, in the latter case, the FCA’s policy intention is that the advice requirement should not apply here.

In relation to question 5, we understand the FCA’s rationale for seeking to exclude the conversion or transfer of pension policies with a GAR from the requirement for advice from a Pension Transfer Specialist at the current time.  However, as we note above, this is an area in which we can expect to see develop over the coming months and years and, as such, consider this to be an aspect to keep under review.

Pension transfers for the purpose of crystallising benefits

We support the FCA’s proposal, set out in section 3 of the consultation document, that all advice on DB to DC pension transfers – including any provided for the purpose of crystallising the benefits being transferred – should be carried out or checked by a Pension Transfer Specialist.

Next steps

We fully support the FCA in its consideration of further changes to its rules on pension transfers and the suitability of advice (described at paragraph 2.45) in the light of developments in this market.