Defined benefit (DB) transfers can provide difficulties for Trustees and are often a source of frustration for members. Traditionally most such transfers would have taken place between two DB schemes, and such transfers still occur today. However, since the introduction in 2015 of the pension freedoms for defined contribution (DC) benefits, a large and growing number of transfer requests now involve members wishing to give up their guaranteed DB benefit to switch to a DC environment where they can take advantage of the greater flexibilities around when and how to access their funds.
Transferring between DB schemes has often been a fairly relaxed exercise in practice, since generally the transfer is made to another clearly bona fide scheme, and the quoted transfer value will be readjusted if there is a delay in execution. Generally, therefore, the member’s interest is fully protected.
Transferring to a DC arrangement is potentially more problematic, however. A significant increase in the volume of such transfer requests has inevitably impacted overall scheme response times. Given that the member is probably requesting the transfer in order to avail themselves of the greater freedoms, delays in making the transfer have a potentially greater impact on the member. Add into the mix questions of whether the member really appreciates what they are doing in giving up the DB guarantee, and the huge growth in scam activity targeting vulnerable members and it is easy to understand why this area has become a difficult one for Trustees to get right.
In trying to balance satisfying the member’s legal right to require a transfer with protecting them from poor decisions or even abuse, many Trustees understandably err on the side of caution before granting a transfer request. The situation has not been helped by some difficult to reconcile court cases and Ombudsman Determinations holding Trustees responsible for variously allowing, or refusing, transfers – or even simply delaying them pending the outcome of more detailed investigations.
Transfer processing times have always varied between schemes, but these problems have led to even greater discrepancies – even between individual members of the same scheme. Such discrepancies, even where they are due to justifiable Trustee procedures, can be difficult for members to understand, resulting in suspicion and annoyance. Scammers exploit this to criticise Trustees and allege that they are deliberately trying to prevent a member from being able to exercise their legal right to transfer. This builds trust between member and scammer, undermining the relationship between member and scheme and increasing the risk to the member’s retirement benefits.
Code of Good Practice
In an attempt to address these issues and make transfers more predictable and safer for members, whilst also protecting Trustees, the Pensions and Administration Standards Association (PASA) is intending to publish a Code of Good Practice by the end of 2020. Compliance with the Code will be voluntary, but the Ombudsman is expected to reference it as a source of what good industry practice looks like.
The objectives are to improve:
- the overall member experience through faster, safer transfers,
- communications and transparency in the processing of transfers, and
- efficiency for administrators.
Priority will continue to be given to effective safety checks for scams. However, in cases devoid of any valid concerns the emphasis will be on processing transfers as speedily as possible, in accordance with timescales set out in the Code.
The Code will contain a transfer template produced jointly by a working group representing the Financial Conduct Authority, The Pensions Regulator and PASA. It will also provide a series of example documents which schemes may use, along with practitioner notes to aid application to practical cases. PASA published a consultation document in February 2020 to gather industry views on its proposals for the Code’s content. The consultation closes on 30 September.
Although the Code envisages that its templates and processes will be widely used, compliance may still be achieved using schemes’ own processes where they are shown to be consistent with the Code’s principles and processes.
Principles of transfers
The Code is built upon a number of good practice principles:
- member communications should be fair, clear, unbiased and straightforward
- members (and other stakeholders) should be kept informed of any delays in processing
- administrators should work with other stakeholders to encourage adherence to the objectives of the Code
- communications should be designed to reflect best practice, adhering to template documents where possible
- working practices and processes should be designed to comply with the Code including the target timescales listed.
When working on transfer requests, schemes should at all times apply these principles.
Scope of the Code
The core of the Code is the “standard case” transfer, with target timescales set for both the quotation and settlement stages. The concept of a standard case transfer was the subject of PASA Guidance published in July 2019. In the Code, the transfer process is broken down into constituent parts with timescales for each. Helpful flowcharts are also provided.
A standard case is where:
- the request constitutes a request for a guaranteed transfer value
- the request is received via the scheme’s standard “business as usual” process
- the administrator has the benefit of partial or full automation to calculate the transfer value or access to transfer values automatically calculated by the Scheme Actuary.
A non-standard case might justify a longer timescale and is where:
- significant manual intervention is required (but this will not provide cover for unjustifiable scheme inefficiencies)
- a partial transfer is sought
- an overseas transfer – a transfer of a person residing overseas, involving an overseas adviser or an overseas scheme – is involved. (However, the standard case quotation timescale is likely to apply if the overseas element is known about from outset)
- further due diligence is expected in accordance with the Pension Scams Industry Group’s Code of Good Practice (although this is more likely to affect the timescale at the settlement, rather than at the quotation, stage)
- specific Trustee or employer consent will be required.
The Code also makes clear that the following cases will be out of scope:
- bulk transfers including TUPE transfers
- bulk member options exercises
- schemes in wind-up, or following an insolvency-type event, including where the scheme is in a Pension Protection Fund assessment period
- requests for illustrative transfer values
- pension sharing cases.
In total, the maximum expected time for the quotation stage is 7–10 working days depending upon whether the case is standard or non-standard. Where a referral to the actuary for review or sign-off is required, 12-15 working days is the maximum. The settlement stage is expected to be completed within 9-11 working days. These timescales have been compiled from the PASA working party’s experience of current good practice, and are believed to be widely achievable, although they are open to consultation.
The Code is a helpful initiative, which should be welcomed by all those involved in DB pension schemes. The creation of an industry standard should benefit both Trustees and members, providing clarity and consistency around a challenging subject. Although compliance will not be compulsory, peer pressure and pressure from the Pensions Ombudsman and other regulators should ensure that most, if not all, schemes will comply. Furthermore, there will be no hiding place for non-compliant schemes: administrators encountering delays in transfers attributable to another scheme’s failure to follow the Code will be encouraged to call out the offenders.
Schemes may have to change aspects of their practice in order to meet the new standards. This may include adopting more automation and/or increasing available resources to speed up internal processes and instituting new internal review procedures to overview compliance. Some may find this challenging and it may generate costs in the short term. However, over time cost savings should arise from such things as a reduction in the number of follow-up data requests from advisers, and an improvement in available member and scheme information from outset in a standard format.
There will also be a 12-month period for schemes to become compliant, which should ease the pain. Nevertheless, Trustees might be advised to look at the proposals sooner rather than later and begin planning any changes that might be required. Ultimately however the benefits for all parties should be worth the effort.