Bulk transfers of DC pensions without consent – is existing legislation fit for purpose?

The Department for Work and Pensions (DWP) has issued a call for evidence on bulk transfers of benefits without member consent between defined contribution (DC) pension schemes.  It is seeking views on the current provisions and whether they could be improved.  In this post we give an overview of the current position and its perceived defects before considering how the current process could be improved.

The call for evidence looks only at bulk transfers between DC schemes and not at bulk transfers between defined benefit (DB) pension schemes.  Consultation on the provisions governing bulk transfers between DB schemes is expected later this year.

When can a bulk transfer without consent be made? 

Legislation[1] currently permits bulk transfers of members’ accrued benefits without their consent provided certain conditions are met. The conditions are:

• an actuarial certificate must confirm that members’ rights in the receiving scheme will be “broadly, no less favourable” than their rights in the transferring scheme; and
• there must be a prescribed relationship between the transferring and receiving schemes.

There are a number of reasons for making the process more appropriate for DC bulk transfers.  One is to enable scale to develop in pension provision by removing barriers to consolidation (which can drive down cost), another is to avoid members’ benefits being stuck in older schemes which may have high charges or where a scheme’s employer has ceased to exist and there is no trustee in place.  In addition, it is currently difficult for providers of stakeholder schemes to transfer members to more modern, lower cost schemes.

The actuarial certificate

 A particular concern is that the “broadly no less favourable” test is not appropriate to be applied to DC transfers. DB schemes are required to appoint an actuary; DC schemes are unlikely to have one in place.  Even where a DB bulk transfer is made, there is a lack of consistency on how the “broadly no less favourable” test is applied.  The legislation does not set out clear principles to use.  One recent case[2] concerning a DB bulk transfer has highlighted a lack of flexibility in the test.  The judge in the case held that in applying the test, the actuary should not compare the security of members’ benefits in the transferring and receiving schemes when considering whether he should issue the certificate.  Many would agree that the security of the members’ benefits is a very relevant consideration when comparing schemes.

In the call for evidence, the DWP suggests that removing the requirement for an actuarial certificate and instead placing the burden on the trustees to decide on the appropriateness of the transfer “would not offer adequate clarity for trustees or member protection”. The DWP is seeking views on whether it would be better for an independent third party (perhaps a financial adviser rather than an actuary) to assess the relative benefits of the transferring and receiving schemes.

Which relative benefits should be considered for DC bulk transfers?

Other measures which may be more appropriate when comparing the transferring and receiving schemes in a DC bulk transfer include:

• standards of governance,
• charges,
• investments and
• retirement options.
• the relationship condition

As noted above, the legislation currently provides that there must be a prescribed relationship between the transferring and receiving schemes.  Either:

• the transferring scheme and the receiving scheme relate to persons who are or have been in employment with the same employer; or
• the transfer is a consequence of a financial transaction between the transferring scheme employer and the receiving scheme employer.

A difficulty here is that until the first member is transferred, the two schemes would not relate to persons who are or have been in employment with the same employer.

In addition, where the only employer to whom the transferring scheme had ever been related has been dissolved, and there is no longer a trustee of the scheme, a bulk transfer without members’ consent could never proceed.

Stakeholder schemes

Where the transferring scheme is a stakeholder scheme, the scheme quality condition and the scheme relationship condition need not be met. However, the legislation requires the receiving scheme to be a stakeholder scheme, the transferring scheme must have commenced winding-up and there are further requirements relating to the amount of the transfer payment.

The industry view is that these requirements are restrictive and out-dated as many stakeholder schemes were set up prior to the introduction of auto enrolment and the implementation of the charge cap for default funds.  We agree that it would be very sensible to enable the smooth transfer of benefits from a stakeholder scheme to a scheme (for example a group personal pension scheme) with better terms.  The important proviso is that relaxing the restrictions on making bulk transfers should not come at the expense of member protection.

The deadline to respond to the call for evidence, which can be viewed here, is 21 February 2017. After the call for evidence closes, there will be a consultation and more industry engagement during 2017. Should secondary legislation be required, the aim is for it to be in place by April 2018.

[1] The Occupational Pension Schemes (Preservation of Benefit) Regulations 1991

[2] Pollock v Reed