Looks at the requirement to take advice for pension scheme members seeking to transfer or convert 'safeguarded benefits' (such as defined benefits) worth more than £30,000 into 'flexible benefits'Jump to full report >>
The ‘pension freedom’ reforms introduced in April 2015 gave people aged 55 and over more flexibility about when and how to draw their pension savings (previously most people had had to buy an annuity). They were not primarily aimed at members of defined benefit (DB) pension schemes (such as final salary schemes) for the majority of whom, it was likely to be in their best financial interests to remain in their DB scheme. However, members of DB schemes had the right to a Cash Equivalent Transfer Value (CETV) allowing them to transfer to any other scheme, subject to certain conditions. The Government recognised that the introduction of the pension freedoms might make transfers out more attractive. The Government sought views on a range of options – from the right of transfer altogether to leaving it unchanged (Cm 8835, March 2014, para 5.15).
Following consultation, the Government decided to introduce two new safeguards to protect individuals and pension schemes – a new requirement on individuals to take appropriate independent financial advice before a transfer can be accepted and new guidance for trustees on their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values (Cm 8901, July 2014, chapter 4).
The Government legislated in the Pension Schemes Act 2015 (s48) to require trustees or scheme managers to check that an individual with ‘safeguarded benefits’ had received appropriate independent advice before transferring or converting them into flexible benefits. ‘Safeguarded benefits’ are defined in the legislation as pension benefits that are not money purchase or cash balance benefits (s48 (8)). In practice, they are “any benefits which include some form of guarantee or promise during the accumulation phase about the rate of secure pension income that the member (or their survivors) will receive, or will have an option to receive.” The rationale is to ensure that individuals are fully aware of the additional security and often valuable guarantees they would be giving up. (DWP factsheet, January 2016). The advice requirement does not apply if the total value of the individual’s safeguarded benefits is £30,000 or less (SI 2015/742, reg 5).
In February 2018, the Work and Pensions Select Committee published its report on the British Steel Pension Scheme, expressing concern about the role played by “dubious financial advisers in tandem with parasitical so-called “introducers” in encouraging steelworkers to transfer their pension rights into a DC scheme. It said the advice requirement was there because a DB transfer was “not usually in someone’s interests”:
It means giving up generous, indexed and stable benefits in favour of a riskier investment. Many BSPS members were shamelessly bamboozled into signing up to ongoing adviser fees and unsuitable funds characterised by high investment risk, high management charges and punitive exit fees.
It described the FCA’s response as “too little too late” and made a series of recommendations to which the regulators have since responded (see Work and Pensions Committee - British Steel Pension Scheme (Feb 2018)
The support provided to British Steel Pension Scheme members during the ‘time to choose’ exercise is discussed in more detail in Library Briefing Paper CBP 8288.
Commons Briefing papers CBP-8382
Author: Djuna Thurley