Bulk transfers of DC pensions without member consent – Sackers’ response to DWP consultation
The DWP has called for evidence on how the current provisions on the bulk transfer of defined contribution pensions without member consent, in particular from occupational and stakeholder pension schemes, could be improved.
In this response
- General comments
- The actuarial certificate (the scheme quality condition)
- Relationship between transferring and receiving schemes (the scheme relationship condition)
The issue of bulk transfers of DC pensions has given rise to a number of practical difficulties over the years. We therefore welcome the DWP’s plans to address this, and the opportunity to provide input into the current call for evidence.
In our experience, whilst DC–DC bulk transfers take place between schemes, the current legislation places some unnecessary some hurdles in the process. As such, we welcome the DWP’s move to simplify the requirements in this area; particularly as such transfers are becoming increasingly common.
Regulation 12(3) and Schedule 3 of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 require the actuary to certify that the transfer credits acquired in the receiving scheme are “broadly, no less favourable than the rights to be transferred”. We agree with the DWP’s comment that this test “may not be suitable for DC schemes” and that the requirements need to be updated to reflect the current DC landscape.
We recognise the merit of actuarial input where there are DB elements of a benefit to value, for example, in a DC scheme with some form of DB guarantee. However, for pure DC schemes, the requirement for an actuarial certificate adds an unnecessary layer of complication.
In our view, the simplest and most practical approach for pure DC schemes would be to leave the decision for the trustees to make, without the need to appoint a scheme actuary or other appropriately qualified person to prepare a certificate or provide advice. To insist on such formal requirements would add a layer of complexity, delay and cost to the transfer process which would not bring any additional value for members.
We believe that introducing a requirement for trustees to consider and apply suitable technical guidance could achieve the appropriate level of protection for members, without the need to obtain an actuarial certificate or equivalent confirmation from a third party. The guidance could cover key issues around member security, governance, charges, investments, retirement options and, if possible (because we do not see how this can be ignored in practice), tax implications around protected pension ages and protected cash lump sums. In our experience, well governed trustees do consider such matters in practice now anyway, and introducing formal technical guidance which records all of these points in one place would be an effective way of achieving a certain level of consistency of approach. As the DWP suggests, technical guidance for trustees would also be welcome for its reduced cost and simplicity, particularly for smaller schemes.
We acknowledge the DWP’s comments in relation to clarity for trustees and member protection (paragraph 11). We would, however, point out that the risk of member challenge and reliance on the interpretation of trust law by the courts is one which already exists, irrespective of the fact that actuarial certificates must currently be obtained.
The scheme relationship condition currently requires transfers without consent to take place where there is some kind of underlying relationship between the employers using the schemes.
As acknowledged in the call for evidence, this condition had its origins in the predominantly single-employer pension landscape. The market is very different now. For example, transfers into master trusts, which are commonly used by employers to fulfil their automatic enrolment obligations, may not always meet this condition. (We are also seeing some transfers which seek to move from occupational schemes to contract-based schemes and vice versa.)
We therefore consider that the nature of such transfers in the current DC environment, together with the fact that there are now minimum governance standards in place that all qualifying schemes are expected to meet (which would include any receiving scheme in this scenario), means that the scheme relationship condition is no longer needed.
The call for evidence asks whether it would be desirable to have in place any form of barrier to the consolidation of small pots in occupational pension schemes. In our view, such barriers are not required. We understand that the most likely home for such pots would be a master trust and that the new Pension Schemes Bill regime would control the risk of members ending up in a poorly performing or poorly governed master trust.
Consideration does, however, need to be given to the fact that master trusts may need to make transfers whilst they are ongoing – either to re-focus their membership profile, or to merge parts of their schemes with other arrangements, or to transfer members into appropriate decumulation vehicles (which could develop at some future point in time). Any new bulk transfer legislation or guidance will need to dovetail with the Pension Schemes Bill and its related regulations to make sure that these circumstances are not overlooked.