Occupational pension schemes - changes to transfer rights and appropriate independent advice

Occupational pension schemes - changes to transfer rights and appropriate independent advice


Author: Suzanne Burrell

Applies to: UK wide

The Pension Schemes Act 2015 ('Act') amends the statutory rights to transfers from Occupational Pension Schemes ('OPS') so that members will (from 6 April 2015) have a statutory right to a partial transfer value.

The legislation also introduces requirements around advice and the new guidance guarantee for defined contribution pension benefits. These changes are being introduced to help the new flexibility relating to defined contribution benefits.

Partial transfers

Prior to 2006, the scope for OPS to allow partial transfers of benefits was very limited and applied only in relation to contracted-out benefits. Since the introduction of tax implication in 2006, it has been possible for partial transfers to be taken from a pension scheme if a pension scheme's rules allow it. There has previously been no statutory right to partial transfer of benefits.

In order to facilitate access to some of the new flexibilities around defined contribution pensions, the Act makes various amendments to existing pensions legislation. The Act was originally drafted to introduce a framework for defined ambition pensions but amendments tying in with the new flexibilities were introduced as the Act was going through parliament.

The statutory transfer rights contained in the Pension Schemes Act 1993 are amended so that members who have more than one category of benefit within the same pension scheme will have a statutory right to transfer one category of benefit while leaving other benefits behind. Benefits for these purposes will fall into one of three categories:

  • money purchase benefits
  • flexible benefits other than money purchase benefits
  • benefits that are not flexible benefits

This change is relevant for all schemes, as it will affect any scheme where AVCs are provided on a money purchase basis.

The legislation will restrict pension scheme trustees from requiring a total transfer of benefits. Schemes may insist that a total transfer of one category of benefits is required but a scheme cannot force a member who wishes to transfer one category of benefits to also transfer all categories of benefits.

Additionally, it will not be possible to prevent a member who exercises a right to a partial transfer from accruing rights to another category of membership. A member could therefore retain active membership of a defined contribution section while transferring out his closed defined benefit section benefits.

Some of the existing restrictions contained in the legislation will remain in place. For example, a member can only take a statutory transfer in relation to non flexible benefits if they are more than 12 months away from normal pension age. This means that any scheme which wishes to offer a member the right to take a transfer of their DB benefits when they are within 12 months of normal retirement age will need to provide a non statutory right to transfer under the rules. The 12 months limit will not apply to flexible benefits.

There is currently an existing right in legislation for a member who leaves service within a year of normal retirement age a right to take their benefits within six months of leaving pensionable service even though they are otherwise within a year of normal pension age. The Pension Schemes Act once amended by the new Act, will no longer allow this particular flexibility.

The right to a statutory transfer in respect of a particular category of benefits will only apply if the following conditions are met:

  • a member is no longer accruing benefits in that category
  • if the benefits are not flexible benefits then they stopped accruing at least a year before normal pension age
  • no crystallisation event in relation to those benefits have occurred. Crystallisation events are defined as one of the following
  1. pension has begun;
  2. an annuity has been purchased;
  3. sums have been designated for the payment of drawdown benefit.

Appropriate independent advice

The government considered whether to prohibit defined benefit to defined contribution transfers in private sector schemes as they have done in certain public sector schemes, but the government decided not to implement this. There will however be a statutory requirement on transferring scheme trustees to ensure that members who wish to take a transfer from a defined benefit to a defined contribution pension scheme must take independent financial advice.

Schemes may see an increased interest in transfers out of pension schemes because members may be attracted by the new defined contribution flexibility which is available.

Regulations will set out the scope of any exceptions and these include an exception in relation to members with CETVs of less than £30,000 (regulation 5 of the Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) Regulations 2015).

From 6 April 2015, trustees will be required to check that a member has received 'appropriate independent advice' from an FCS registered financial adviser before taking any of the following steps:

  • converting safeguarded benefits (general defined benefits) to flexible benefits (money purchase or cash balance)
  • making a transfer payment in respect of safeguarded benefits to a scheme in which a member will acquire flexible benefits
  • paying a lump sum in respect of safeguarded benefits that will be an uncrystallised fund pension lump sum. At present, the legislation does not allow for this anyway

The Occupational Pension Schemes (Consequential and Miscellaneous amendment) Regulations 2015 set out the procedure which trustees will be required to follow. For trustees, the key compliance points are ensuring that they notify members who request transfer values of the advice requirement and ensuring that a record of the checks they take is kept. Trustees are not required to obtain a copy of the advice or to refuse to make a transfer payment where a member has been advised against taking a transfer but still wishes to go ahead. The pensions regulator's draft guidance on DB to DC transfers recognises this and says that it is not the trustees' role to make a decision which the trustees regard as inappropriate for that member.

The legislation also introduces a statutory amendment power. This amendment power will enable trustees to amend rules so that if trustees are required to check that a member has received appropriate independent advice, the trustees have carried out that check but the check did not confirm that the member/ survivor had received appropriate independent advice, the trustee is not required to make the transfer. This is reflected in the amended transfer legislation anyway although trustees should also look at what, if any rights there are under pension scheme rules to a non-statutory transfer.

A failure by the trustees to undertake the checks will result in a fine on the trustees but will not affect the validity of the transfer.

The regulations specify that where an employer is undertaking an incentive exercise to encourage members to transfer benefits out of the pension scheme, it will need to arrange and pay for independent advice.

It remains to be seen whether the new defined contribution flexibility will make transfers out of defined benefit schemes more attractive or whether the requirement to engage a financial adviser will put some people off. This may depend on what, if any, additional flexibility is introduced into occupational pension schemes.


This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

About the author

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Suzanne Burrell


03700 86 8902

Suzanne is an experienced pensions lawyer advising both trustees and employers. Her experience encompasses all pensions issues including: auto-enrolment, pension scheme mergers and bulk transfers, pensions regulatory change, contingent assets for pension schemes and pensions funding. She has particular experience advising both charities and co-operative sector clients.

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