Transfer Rights – Post-April 2015


Transfers are emerging as one of the key issues for members of both DB and DC schemes when accessing the flexibilities promised by George Osborne in the March 2014 budget.

Anecdotally few occupational DC schemes are likely to offer drawdown and other flexible options, at least initially. This means that, like DB members, in order to access these options members will need to take a transfer to an arrangement that does offer such flexibility.

It is therefore critical to the success of Government policy in this area that transfers operate smoothly. As a result, the Government has drafted a number of extensions to the existing rules which have been included in the Pension Schemes Bill 2014-15 (the Bill). Further details on transfers are expected to be revealed in the updated Transfer Regulations, due in early 2015.

In this Alert:

Key points

  • We are anticipating a rise in transfer requests from members keen to access greater flexibility after the Budget changes come into force in April 2015. For more details on the Budget changes, please read our Budget 2014 Alert.
  • Members currently have a right to take a CETV up until one year before Normal Pension Age (NPA).
  • From April 2015, that right will be extended for members with flexible benefits up to the date of crystallisation of benefits.
  • From April 2015, a member with non-flexible benefits will have a right to a CETV up to one year before NPA.
  • There are additional considerations for DB trustees, including checking that DB members receive independent financial advice before a transfer to a DC arrangement is paid.

Current rules

When a member of a scheme wants to transfer to another scheme, their pension rights are given a cash value (the CETV or “cash equivalent”) and that amount is paid from the transferring scheme to the receiving scheme.  The CETV is then converted into rights in the receiving scheme.

Currently, a member who leaves pensionable service at least one year before NPA will be entitled to a CETV.

Changes from April 2015

Members with flexible benefits

From April 2015 (based on the current draft of the Bill) a deferred member with flexible benefits will have an extended right to a CETV up to the date of crystallisation of benefits.

There are three key preconditions to the extended right:

  • Members must be deferred to request a CETV, as is currently the case.
  • Members must have flexible benefits. The Bill includes new definitions of flexible benefits. Flexible benefits are money purchase benefits (MPBs), cash balance benefits or other benefits “calculated by reference to an amount available for the provision of benefits to or in respect of the member…”.
  • The right must be exercised before crystallisation. Broadly, crystallisation is payment of a pension, designating funds for drawdown and (in a personal pension scheme) purchasing an annuity.Subject to certain conditions, a member may request a partial transfer as a CETV (see below).

Members with non-flexible benefits

Members with non-flexible benefits (ie. DB rights) will have a statutory right to take a transfer only up to one year before NPA.

So, the cut-off of one year before NPA for a CETV for DB benefits remains. Indeed, the right for a member to take a transfer within 6 months of leaving service (even that is within a year before NPA) has been removed in the current draft Bill.

Partial transfers

On or after 6 April 2015, all members will have a statutory right to a partial transfer. At present a partial transfer is only available to members if the scheme rules offer this option.

If a member takes a statutory partial transfer they must take a transfer of all their rights in one of the three new categories of benefits: MPBs, flexible benefits other than MPBs and non-flexible benefits.

Each category may cover one or more types of benefit – for example, both AVCs and additional DC benefits in a hybrid scheme may fall within the MPB category. As a result the statutory right to take a partial transfer may cover only one statutory category but be comprised of more than one type of benefit.

Scheme rules

There may be circumstances in which it is advantageous to offer more flexible transfer rights under the scheme rules than those offered by statute.

For example, the statutory right to a CETV does not apply to internal transfers. This means that a member in a hybrid scheme would not have a statutory right to transfer their DB benefits to the DC section of the same scheme which might offer flexible options, such as drawdown.

In addition, the new partial transfer rights may not fit with the existing benefit design of the scheme, with the result that a member may be required to transfer rights which they would rather leave in the transferring scheme.

Scheme rules should, therefore, be checked against the new legislation to ensure that they continue to offer transfer rights which tie in with the benefit design of the scheme.

DB transfers

The Government’s report on DB to DC transfers concluded that such transfers will continue to be allowed in private sector schemes (but not from unfunded public sector schemes). But DB trustees will be asked to “check” that a member has received “appropriate independent advice” before a CETV of DB benefits is paid to a DC scheme. It is currently unclear what this will mean in practice. But further details are expected to be included in updated Transfer Regulations, due to be published in early 2015.

CETVs may be reduced in DB schemes which are underfunded on the scheme funding basis, if the “insufficiency conditions” are met. For this purpose, a formal “insufficiency report” needs to be put in place with an effective date not earlier than the effective date of the most recent actuarial valuation. It is not necessary for trustees to reduce transfer values if an insufficiency report is in place but it gives trustees an option to do so to protect scheme cash flows, if necessary.

Underfunded DB schemes which anticipate an increase in transfer requests should consider commissioning an “insufficiency report” if one is not already in place.

Action points

  • Trustees should review member communications on transfers, as these will need to be amended to reflect the new rights. We are expecting revised Disclosure Regulations, again in early 2015.
  • Trustees should review scheme transfer rules to ensure that the transfer rights offered continue to tie in with the benefit design of the scheme.
  • Trustees of underfunded DB schemes should consider commissioning an up to date “insufficiency report”, if an increase in transfer requests is anticipated.
  • DB trustees should look out for further news on the requirements on trustees for DB to DC transfers.

If you have any further questions or need any advice, please get in touch with your usual Sackers’ contact.