Pension Schemes Act 2015
The Pension Schemes Act 2015 (the “Act”) received Royal Assent on 3 March 2015. Originally designed to introduce a framework for defined ambition (DA) (see our Alert), these provisions are now somewhat overshadowed by those which pave the way for the new benefit flexibilities on and after 6 April 2015.
In this Alert
- Key points
- Transfer rights post April 2015
- Defined Ambition
- Action points
- From April 2015, members with “flexible benefits” will be able to request a CETV up to the date of crystallisation of benefits (rather than up until one year before Normal Pension Age (“NPA”).
- On or after 6 April 2015, all members will have a statutory right to a partial transfer in respect of a category of their pension benefits.
- With effect on and from 6 April 2015, trustees must check that a member with “safeguarded benefits” (DB) has received “appropriate independent advice” in relation to DB to DC transfers or conversions.
- The Act sets out the framework for “Pensions Wise” (formerly known as the guidance guarantee) and establishes a duty on the FCA to make rules to require trustees to “signpost” members, or survivors of members, with rights to flexible benefits towards the guidance service.
- The Act will amend current pensions legislation with the aim of creating a “specific DA pension space”.
Transfers will be a key issue for occupational pension schemes on and after 6 April 2015. Where DC schemes do not intend to offer the new flexibilities, members will need to take a transfer in order to access them. Similarly, a DB member will need to transfer to a DC scheme if they want to take advantage of the new retirement options.
On or after 6 April 2015, all members will have a statutory right to a partial transfer. At present, this option is only available to members under a scheme’s trust deed and rules.
If a member takes a statutory partial transfer, they must take a transfer of all their rights in one of three new categories of benefit:
- money purchase benefits
- flexible benefits other than money purchase benefits (broadly cash balance)
- benefits that are not flexible benefits.
Each category may cover one or more types of benefit within a pension scheme. For example, a hybrid scheme could contain DC benefits and DC AVCs. Both of these would constitute “money purchase benefits” and, as such, would fall to be transferred together in any partial transfer.
Members with non-flexible benefits
DB members will retain the current statutory right to request a transfer up to one year before NPA. However, they will lose the current ability to take a transfer within six months of leaving service (even if that is within the year before his or her NPA).
Members with flexible benefits
From 6 April 2015, a deferred member with flexible benefits will have an extended right to a CETV up to the date of crystallisation of benefits. Broadly, crystallisation is payment of a pension, designating funds for drawdown and, in the case of a personal pension scheme, purchasing an annuity.
Independent advice in respect of DB transfers and conversions
To address the potential risk of members choosing to transfer their benefits when it is not in their best financial interests, the Act introduces a requirement for trustees of occupational schemes to check that a member, or survivor of a member, has received “appropriate independent advice” before transferring their DB benefits to, or converting them into, DC.
Further details of this requirement are set out in draft regulations. Please see our Alert for details.
Collective Defined Contribution (CDC)
The Government aims to allow for the development of several types of DA scheme, including a pension income builder (where yearly contributions are split between the purchase of a deferred annual nominal annuity and a pooled investment fund). As the intention is that the more detailed design features of the other models may be created within the new legislative framework, the Act only makes specific provision in respect of CDC (defining the concept of “collective benefits” and allowing for regulations to be made in respect of matters such as setting benefit targets and valuations).
In a CDC scheme, assets are pooled rather than retained in an individual fund. When a member retires, they do not select an individual retirement product, rather the income is paid from the asset pool. This means that members have access to a wider range of investment opportunities than in an individual DC arrangement. The pooling of funds may also act to smooth investment return so that outcomes are more stable.
The Act will introduce new, mutually exclusive, categories for pension schemes. Each type of scheme is defined in terms of the pension promise it provides. Broadly, this promise will either refer to all of the benefits (DB), some of the benefits (shared risk) or there will be no promise at all (DC). If a scheme provides more than one type of promise, for the purposes of categorisation it will be treated as more than one scheme.
The Act will also make consequential changes to current pensions legislation which aim to ensure it will apply appropriately to each category of scheme.
These provisions will be brought into force by regulations at an appointed date.
The Government’s preparation for so-called “Flexi-day” continues apace. With respect to this part of the jigsaw, trustees will need to ensure their member communications reflect the new rights to statutory transfers. Similarly, systems should be put in place to deal with member requests on and from 6 April 2015.