Pension Transfers – seeing the wood for the trees – Part 1
The FCA has published changes to its regulations affecting advice on pension transfers.
The new rules took effect from 8 June 2015. The changes create yet more regulation following the introduction of the pension freedoms in April and which permitted members over the age of 55 to access their pension savings from money purchase schemes.
We consider the FCA's paper in two blogs covering both the changes and other issues arising from the FCA's consultation. In this first blog we consider the changes introduced.
The changes are a result of the Pensions Schemes Act 2015 which requires a member of a pension scheme to receive advice from an FCA authorised adviser if (1) they have "safeguarded" pension benefits and (2) the transfer value is at least £30,000. Advice has to be taken before (1) transferring benefits, (2) converting safeguarded benefits to flexible benefits or (3) on taking an uncrystallised pension funds lump sum (UFPLS).
The changes also affect when advice has to be provided or checked by a Pension Transfer Specialist (PTS).
When does a member need advice on a transfer?
The FCA now regulates advice to transfer or “convert” “safeguarded benefits” including (1) from a final salary scheme to a trust based money purchase scheme or (2) when a member crystallises their pension before their normal retirement date. The effect of the regulation is that advice from a PTS is likely to be required.
“Safeguarded” benefits are (unhelpfully) defined in the negative and include all benefits that are not money purchase benefits or cash balance arrangements. This broadly captures all final salary benefits and other guarantees and promises in other types of scheme. The examples in the FCA’s paper of "safeguarded" benefits include guaranteed death benefits, mortality rates “etc”; so this is not an exhaustive list and it is unclear where the line is to be drawn.
The extension of the FCA’s powers to the “conversion” of benefits with a value of over £30,000 is intended to ensure that the pension transfer rules (i.e. the requirement for advice from a PTS) apply where (1) transfers take place within a scheme and (2) a member intends to access their pension via the new UFPLS and in doing so, gives up their safeguarded benefits.
Members falling within the “conversion” rules will need to obtain advice from a PTS even if immediately accessing their pension saving in order to ensure that they understand the safeguarded benefits they are giving up. However, accessing an annuity does not constitute a conversion and although regulated advice, will not require advice from a PTS.
So, when is a Pension Transfer Specialist required?
The previous rules required the involvement of a PTS for pension transfers within the FCA’s remit. Historically this meant that PTS' were involved in transfers from final salary schemes to money purchase schemes, provided the transfer did not take place at normal retirement date.
Now, instead of looking at the type of scheme a member is transferring from, the rules look at the type of benefits a member is moving from and to – i.e. what is the member giving up. Broadly, a PTS will continue to be required to provide or check advice on the conversion or transfer of pension benefits save for where (1) there is a transfer of a pension with a guaranteed annuity rate, (2) transfers or conversions which do not include the transfer or conversion of safeguarded benefits to flexible benefits and (3) transfers from a final salary scheme to a money purchase arrangement where a member crystallises their benefits at normal retirement date
The justification for leaving guaranteed annuity rates outside the requirement for advice from a PTS (albeit advise from an authorised adviser is still required) is that in the FCA's eyes advising on the loss of a guaranteed annuity rate was “far less complicated than advising on a transfer from a final salary scheme”.
It is also worth noting that trustees of final salary schemes are now under an obligation to check that members obtained advice from a regulated adviser before transferring out of the scheme where their pension has a transfer value of over £30,000. However, trustees do not have to check (1) the content of the advice or (2) whether or not the regulated adviser is also a qualified PTS.
Where does this leave advisers?
Broadly, anyone giving up a pension with an in-built guarantee will fall within the FCA’s definition of pension transfer and require advice from a PTS. However, the transfer rules are not the easiest to navigate and with more members requesting transfers to take advantage of the new pension freedoms, advisers inevitably face the increasing prospect of having to navigate these rules.