The Occupational Pension Schemes (Preservation of Benefits and Charges and Governance) (Amendment) Regulations 2018


The DWP is consulting on draft regulations that are intended to simplify the bulk transfer of DC pensions without member consent.

In this response:

General comments

We broadly support the DWP’s proposals to simplify the process for “pure” DC to DC bulk transfers. In particular, we consider that the changes will help facilitate transfers to authorised master trusts and should enable some smaller schemes to consolidate into larger schemes.

However, as there will be a different process applied to non-master trust transfers, there is a risk of creating at least the perception of a two-tier regime. Whilst we acknowledge the high standards of protection for members in terms of transfers to a master trust, the requirements that remain for other scheme transfers may hamper some consolidation.

As legal advisers to trustees, employers and providers of workplace pension schemes, our comments relate to those aspects of the consultation which are relevant to our practice. We have not sought to answer every question in the consultation.

Removal of the requirement for an actuarial certificate

As we noted in our response to the DWP’s December 2016 call for evidence, we welcome the move to remove unnecessary hurdles to the “pure” DC to DC bulk transfer process.

The current consultation and draft regulations propose removing the requirement for an actuarial certificate for “pure” DC transfers where the transfer is made:

  • to an authorised master trust
  • to another occupational DC scheme, provided the transferring trustees have obtained and considered the written advice of a “suitably qualified professional” who is “independent” of the receiving scheme.

Requirement for trustees to “obtain and consider” written advice

The draft regulations require that “trustees of the transferring scheme have obtained and considered the written advice of a suitably qualified professional”. This would mean that the trustees can take but then disregard the advice if they consider it reasonable to do so, bearing in mind their trust law responsibilities. Chapter 1 of the consultation document, however, seems to expect that the trustees would not only take but also act on the advice received. We would welcome clarification of the DWP’s expectations here.

Requirements for the “suitably qualified person”

The draft regulations stipulate that the independent professional providing advice to the transferring scheme trustees should be someone with appropriate financial expertise, and “appropriate knowledge and experience of the management of the investments of schemes such as the transferring and receiving schemes”.

We recognise that the investment aspect is an important one, particularly in terms of assessing a DC scheme’s value for members. However, in the same way that the consultation recognises that actuaries are not necessarily the most appropriate professionals to assess receiving DC schemes for the purpose of bulk transfers, we consider that focusing predominantly on the investment aspect means that other important elements of DC schemes may be overlooked.

By way of example, as well as considering the overall the standard of governance of the receiving scheme, paragraph 20 (on page 12) refers to the fit and proper status of key people involved in running the scheme, the systems and processes used by the scheme, and the scheme’s financial sustainability. These are all key, and would not necessarily fall within an investment professional’s sphere of expertise. A wider description of the experience required may therefore be more appropriate here.

It is unclear from the draft regulations how these measures should be assessed. We envisage therefore that this that will be covered in the DWP’s guidance – see further below.

Potential impact of the proposed “independence” requirement

In relation to the proposed requirement for the suitably qualified professional to be independent, it is proposed that the transferring trustees will need to “take account of” whether the person has, within five years prior to providing the advice, been a director, manager, partner or employee of a firm providing advisory, administration, investment or other services in respect of the receiving scheme, or is or has been connected to someone providing such services, and who receives any payment or other benefit from a service provider.

In our view, the five-year requirement could prove unduly restrictive, potentially significantly reducing the pool of advisers available for trustees to choose from. An alternative would be to ensure that advisers may be selected subject to appropriate management of possible conflicts of interest (as happens in the normal course of business when trustees appoint their advisers).

DWP guidance

We note that the DWP is considering whether to develop guidance for trustees on how to review the suitability of a proposed receiving master trust. We would welcome such guidance.

As noted above, it would also be helpful if the guidance could address issues such as selecting a suitably qualified professional and how to deal with potential conflicts of interest.

Removal of the scheme relationship condition

We support the removal of the scheme relationship condition for “pure” DC to DC bulk transfers, on the basis that it is no longer needed in the current environment, where transfers between schemes with no underlying employer relationship are increasingly common, in particular, transfers to authorised master trusts.

Charge cap protection

It is proposed that, where members are protected by the automatic enrolment default fund charge cap in the transferring scheme, the receiving scheme will be required to continue to apply the cap in respect of those members.

We support this measure, and the proposal that any funds into which members protected by the cap are switched without making an active choice should also be subject to the cap.

Further comments

Fund mapping

The consultation refers at paragraph 29 (on page 20) to transferring members into the receiving scheme’s default fund rather than the closest matching fund in the DC scheme. In our view, this may not necessarily be the appropriate choice for the members in question. For example, a member who has self-selected a property fund or an ethical fund in the transferring scheme, may not be content with his or her benefits being transferred out into the receiving scheme’s default fund, which would have very different investment objectives.

We note, and agree with the DWP’s comments, that “the reason why a member originally made an active fund choice will generally not be known to trustees” and that “members who joined prior to the widespread option of default arrangements in occupational schemes may have had no clear reason for choosing the fund several years ago, and would not do so if they were offered a default arrangement now”. However, transferring members may have self-selected funds more recently and for their own good reasons. We do not consider that the automatic transfer of all members into the default fund would be appropriate in all cases. There could well be circumstances where the transferring trustee may not feel comfortable with making such a transfer on trust law grounds, as they would be overriding the member’s investment decision.

Tax treatment

Paragraph 26 (on page 19) explains that the legislation around block transfers and preservation of protected rights, such as tax-free lump sums greater than 25%, protected pension ages, and Lifetime Allowances, are not in the scope of the DWP’s review. It is disappointing that there has been no movement on these issues as they do hamper some transfers in practice. We note that DWP has passed related comments to HMRC and we hope that these will be addressed.

Orphaned schemes

We note that no changes are proposed at this stage in relation to orphaned schemes but that HMRC is working with TPR in this regard. We look forward to further developments in this area.