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In last year’s Budget, the Chancellor announced major changes to the way in which money purchase pension benefits could be accessed, for more information on these changes, see our previous blog posts – Budget 2014: Pensions implications – Part 1, Budget 2014: Pensions implications – Part 2, Freedom and choice in pensions, courtesy of the Coalition and DB to DC or not DB to DC?.

While the Government has yet to decide whether or not and to what extent these changes will also apply to defined benefit (DB) schemes, the trustees of both DB and defined contribution (DC) schemes will need to give some consideration as to how these changes will impact on their scheme.

We have set out below a summary of some of the issues trustees should consider. This list is by no means exhaustive. Trustees should be seeking appropriate advice regarding the implications of the new flexibilities for their scheme and what, if any, actions they should be taking.

Decisions about which flexibilities to offer may well have HR and cost implications for the sponsoring employer (in some cases reducing liabilities) and so employers should also be considering their position with regards to the issues identified below.

What do trustees of DB schemes need to consider?

Trustees of DB schemes will need to consider the following:

  • where their scheme provides DC benefits (in the form of a separate DC section or additional voluntary contributions), whether they should offer the new flexibilities, and if so, to what extent;
  • if they elect to provide the new flexibilities in respect of DC benefits, whether any amendments to the scheme rules are required. Whilst a limited statutory override exists, trustees may feel that it is prudent to formally amend the scheme rules so that the position is clear;
  • if they elect not to provide the new flexibilities in respect of DC benefits, whether they can objectively justify this stance to members, many of whom may be expecting to be able to access their pots;
  • the potential wider impact on the scheme if an increasing number of members are requesting a transfer out (for example, a review of the scheme’s investment strategy and funding position may be necessary);
  • updating the procedures for authorising transfers to ensure members with DB or safeguarded benefits in excess of £30,000 have received independent financial advice from an FCA-authorised adviser prior to any transfer;
  • whether the scheme rules need amending to facilitate requests to transfer out (in particular, in respect of partial transfers of DC or flexible benefits which will be able to occur up to and beyond normal pension age) and to enable the trustees to decline to make a transfer e.g. where the trustees are unable to verify independent financial advice has been received;
  • ensuring they have processes in place to implement transfer requests in a timely manner;
  • whether the scheme rules need amending to reflect the new trivial commutation and small lump sum rule changes;
  • how the new DC flexibilities should be communicated to members – care needs to be taken to avoid incentivising and/or advising members to transfer out/commute their pension. Members will also need to be notified of the reduced annual allowance limit that would apply in respect of money purchase savings where certain new benefit options are taken.
  • how the flexibilities should be communicated in the ‘wake-up’ pack to members approaching retirement and, in particular, how the trustees discharge their statutory duty in respect of the ‘Guidance Guarantee’; and
  • whether the scheme rules need to be reviewed in light of the change in ‘death tax’ charges. 

What do trustees of DC schemes need to consider?

Trustees of DC schemes will need to consider the following:

  • whether they should offer the new flexibilities and if so, to what extent. We would recommend that trustees involve the principal employer in this decision making process.
  • if they elect to provide the new flexibilities, whether any amendments to the scheme rules are required. Whilst a limited statutory override exists, trustees may feel that it is prudent to formally amend the scheme rules so that the position is clear;
  • if they elect not to provide the new flexibilities, whether they can objectively justify this stance to members, many of whom may be expecting to be able to access their pots;
  • whether an amendment to the scheme rules should be made to reflect the statutory right members will have to transfer out up until the time their benefits are first drawn (rather than up to one year before normal retirement date, as most scheme rules will currently permit);
  • where members elect to transfer out and remain employed, what the implications are from an auto-enrolment context;
  • if members are taking advantage of the new options rather than buying an annuity, whether a review of the scheme’s investment strategy (in particular any default fund) may be necessary;
  • whether the scheme rules need amending to reflect the new small lump sum rule changes;
  • how the new flexibilities should be communicated to members – care needs to be taken to avoid incentivising and/or advising members to transfer out/commute their pension. Members will also need to be notified of the reduced annual allowance limit that would apply where certain new benefit options are taken;
  • how the flexibilities should be communicated in the ‘wake-up’ pack to members approaching retirement and, in particular, how the trustees discharge their statutory duty in respect of the ‘Guidance Guarantee’;
  • whether member booklets, communications and other scheme literature need to be reviewed in light of any changes; and
  • whether the scheme rules need to be reviewed in light of the change in ‘death tax’ charges.

Next steps…

  1. As a matter of urgency, trustees should engage with the principal employer to determine which, if any, of the new DC flexibilities they wish to adopt.
  1. Trustees (and, where appropriate, the principal employer) should consider whether any amendments are needed to the scheme rules.
  1. Where appropriate, existing procedures/policies/reporting requirements should be reviewed, and updated, to ensure they comply with the new flexibilities. Trustees should be engaging with the scheme administrator with regards to this as soon as possible.
  1. Trustees should issue a communication to members informing them of the new options available under the scheme (or, conversely, if the scheme will not be offering the new flexibilities, reminding them of the changes and advising them to take appropriate advice). Care should be taken when drafting these communications.
  1. If they elect to offer the new flexibilities/there is an increased level of transfer outs, it may be appropriate for the trustees to review the scheme’s investment strategy and/or funding position.

How can we help?

We are advising a number of trustees and employers on the steps needed to ensure their scheme is fully prepared for the upcoming changes. If you would like some further information please either contact your usual Gateley contact or Michael Collins at MCollins@gateleyuk.com.


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.