DC Focus – transfers & early exit charges
Our update on what's new for trust-based DC & hybrid DB/DC schemes
Following a three month consultation, Andrew Patten looks at the Government's proposals on ensuring early exit charges and the process for transferring benefits between schemes do not deter people from making use of the new pension freedoms.
A Pensions Regulator survey carried out during the consultation revealed that the mean average transfer time for trust-based schemes is significantly longer than for FCA regulated contract-based schemes – 39 days versus 16 days. A PLSA survey conducted at the same time shows an 11 day versus 7 day median average transfer time, with mean times skewed by some very long transfer times. While there are questions about the reliability of the figures and the Government acknowledges there are good reasons for trust-based transfers taking longer, it considers there is scope to narrow the gap. To this end, the Pensions Regulator will issue best-practice guidance on processing transactions promptly and accurately (including considering 'digital by default' approaches), scheme documentation and improved administration processes. Schemes will also be subject to new requirements to report on how they are performing in processing transfers, including against possible benchmarks and targets. The Pensions Regulator will be working with the pensions industry with a view to bringing in measures in the summer.
To speed-up transfers, many in the pensions industry have advocated creating a 'whitelist' of approved transfer schemes. For the moment, the Government has shied away from this, citing the challenge of putting in place a suitably rigorous assurance and monitoring process. It is to develop its thinking on the issue over the course of the year with a focus on the supervision of master-trusts. In the meantime, Pension Wise will be expanding its guidance to help members have a better understanding of what they need to do to transfer their benefits.
A common cause of delay for members looking to transfer both DC and safeguarded benefits from a scheme has been the difficulty in finding a financial adviser to advise on the transfer - a requirement where safeguarded benefits are worth more than £30,000. The Government has not set out any proposals on improving the accessibility and affordability of advice but has said it will do so around the time of next month's Budget, after it has considered responses to the Financial Advice and Markets Review.
A significant cause of transfer delays is the need to carry out checks that a receiving scheme is not a scam or liberation vehicle. Creating a 'whitelist' of approved receiving schemes and providers would remove the need to do this and significantly speed up transfers and we hope that the Government will go down this route. We agree that the design and operation of the system is one which needs careful consideration so that proper checks of whitelisted firms are undertaken and members protected, however, given that the large majority of transfers are to a relatively small number of providers, the Government could have moved more quickly to an interim system.
To facilitate members making transfers and deciding on retirement options, schemes should ensure their member communications are clear, accurate and user-friendly and set out the service a member can expect. Trustees should also satisfy themselves that administrator service levels, performance and charges are appropriate and represent good value for members. Schemes and administrators should bear in mind that members can complain to the Pensions Ombudsman about unreasonable delays and he may order compensation to be paid.
Early exit charges
The Pensions Regulator's survey suggests that early exit charges are an issue only for a small proportion of trust-based scheme members. 11% of schemes apply some charge for members using their pension pot (for example, a charge for payment of multiple UFPLSs). Just 3% impose what the Government considers a true early exit charge - broadly, a charge which would not apply if the member used their pot at their normal or selected retirement date.
A greater proportion of members of contract-based schemes are affected by early exit charges and the FCA will be making rules limiting early exit charges, expected to apply before the end of March 2017. However, the Government is committed to ensuring similar protections apply to members of trust-based schemes and has asked the FCA and the Pensions Regulator to work together in designing an early exit charge cap.
In principle, it is right that members of trust-based DC schemes benefit from protections against excessive early exit charges which are similar to those applying to members of contract-based schemes. In practice, however, these charges will apply to very few members and many members will already be protected by charge cap limits and the requirement for trustees to assess whether charges represent good value.