A number of regulatory changes relating to pension schemes came into force on 6 April 2018.
These changes include regulations covering the following:
- Bulk transfers of money purchase benefits without consent;
- Safeguarded flexible benefits, risk warnings and appropriate independent advice;
- Chair's Governance Statement and disclosure of costs and charges;
- Transfers of contracted out benefits
The first topic is the subject of a separate legal update which can be found here. This update looks at the other changes which recently came into force.
Chair's statement of governance and disclosure of costs and charges.
The Occupational Pension Scheme's (Administration and Disclosure (Amendment)) Regulation 2018 amends the Occupational Pension Scheme's (Scheme Administration) Regulation 1996 and the Disclosure of Information Regulations 2013.
Since 6 April 2018, the Chair's Governance Statement in relation to money purchase benefits will be required to include information and requests for charges for each default arrangement and each alternative fund option and not simply the range of charges. Additionally, the statement will be required to provide an illustration of the cumulative effect of charges and transactions on the value of a member's pension savings.
Information relating to costs and charges will also need to be included on a website and the details of the website should be included in an annual benefits statement. There is a specific requirement in the Regulations to have regard to guidance which is issued and this guidance has been produced by the DWP. The information will be required to be published within seven months of the first scheme year end date falling on or after 6 April 2018.
The DWP statutory guidance on the illustrations sets out the following matters which the illustrations should cover:
- The saving pot size (this should be representative of actual pot sizes within the Scheme and the suggestion is that perhaps the meridian within the Scheme should be used);
- Long Term investment return;
- Adjustments to the effect of costs and charges based on an average of five years transactions;
- Time - this should reflect the approximate duration that the youngest scheme Member has until retirement.
The relevant information should be published on a publicly available website and in a way that can be indexed by search engines. The web address should be referenced in the member's annual benefits statement. One option would be to publish the information on the employer's website and the web page must not include text which prevents the page from being indexed and must link to other pages within the web search engine. The information may not be password protected or require a member to provide information to access the information.
From 6 April 2019 additional information regarding pooled funds will also need to be included. A statement regarding the pooled funds information will be required to be provided to any member or recognised trade union who requests it. Members and recognised trade unions may make such a request once in any six month period. Additionally, the annual benefits statement must say how this information can be obtained.
Additionally, the legislation amends the Statutory Money Purchase Illustration requirements so that these must cross-refer to the pooled funds requirement with the Chair's Statement and also notify members that they have a right to request a hard copy document when the trustees are satisfied that it would be unreasonable for that person to obtain the document from the website on which it is published.
Safeguarded Flexible Benefit and Risk Warnings
Amending Regulations came into force on 6 April 2018 under which members with safeguarded flexible benefit are required to receive certain risk warnings from the pension scheme trustees where the benefits are valued at less than £30,000. Where benefits are valued at more than £30,000 the member must obtain appropriate independent advice.
A safeguarded flexible benefit is one which looks like a money purchase benefit but has a guarantee or promise of some kind sitting behind it. This could include a guaranteed annuity rate or in a hybrid scheme where there is a money purchase benefit with a salary-related underpin.
When assessing whether the value of member's pension pots is above the threshold at which the Member is required to receive appropriate independent advice, the regulations have been amended so that the transfer value of that Member's safeguarded rights should be used. The DWP has published guidance which sets out and explains the information requirements and also suggests best practice for trustees when providing risk warnings.
Personalised risk warnings will be required where a member has safeguarded flexible benefits if any of the following specific triggers arise. The following types of action will trigger a risk warning:
- The member makes a written enquiry about carrying out a relevant transaction (this will include either a transfer payment, conversion of benefits, payment of uncrystallised fund pension lump sum or makes a written enquiry about applying for a transfer quotation;
- The member applies to obtain a transfer quotation;
- The provider gives the transfer quotation; or
- The member makes a written request for a valuation.
Personalised risk warnings must be sent within a month of the event triggering the requirements and at the same time as or in advance of the member's transfer quotation and no later than two weeks before the relevant transaction (such as a transfer) completes.
Personalised risk warnings must include the following:
- Informing the member that their pension contains one or more potentially valuable guarantees, details of features and how they are connected to them;
- Highlights to the member that proceeding with the proposed transaction will result in those guarantees being lost and detailing any other circumstances in which the guarantees will be lost;
- Explaining how the guarantees can be taken and any restrictions which apply.
- The narrative section must be clear and intelligible and a warning to the member that they risk losing the guarantees must be prominent.
The regulations require that in order to determine whether a Member is required to seek financial advice, the trustees must value the member's safeguarded benefits in accordance with the relevant provisions of the Pension Schemes Act 1993 and related regulations, whether or not the individual has a statutory right to a transfer value.
A further point to note is that although the requirement to issue personalised risk warnings does not apply in respect of final salary benefits, there are some changes which will apply. From 6 April 2018, occupational pension schemes are required to disregard any increase resulting from a "best estimate" calculation of the transfer value when determining whether members are required to seek financial advice. Therefore even if transfer values are offered by trustees on a more generous basis than best estimate, they will need to determine whether the member is required to seek advice using the lower best estimate calculation. The requirement to issue personalised risk warnings does not apply in respect of safeguarded non-flexible benefits (in other words, defined benefits).
Bulk transfers of contracted out rights on a without consent basis to schemes that were never contracted-out
The Contracting Out (Transfer and Transfer Payment) Amendment Regulations 2018, which amend the existing Contracting-out (Transfer and Transfer Payment) Regulations 1996, came into force on 6 April 2018.
The new regulations have mainly been prepared in response to the cessation of salary related contracting out since 2016. Commentary across the pensions industry suggests that the existing restriction, namely that bulk transfers without consent of contracted-out rights can only be made to schemes that have been contracted out, has been a significant barrier in recent scheme restructurings.
Under the current legislation, a bulk transfer of accrued contracted out rights, or pensions in payment deriving from contracted out rights may only be made without obtaining individual member consent in limited circumstances. Mainly, a transfer may only be made from a scheme that was formerly contracted out to another such scheme (this is the requirement that is being changed under the new regulations). Additionally, the transfer must qualify as a "connected employer transfer" and the existing regulations specify two conditions, one of which needs to be satisfied, for a transfer to qualify as a "connected employer transfer", being:
- The transferring and receiving scheme relate to persons who are or have been in employment with the same employer;
- The transferring and receiving scheme relate to persons who are or have been in employment with different employers but the transfer is a result of a financial transaction between the employers or the employers are part of the same group.
The requirements around the connected employer transfer condition aren't changing but new conditions will apply where the transfer is being made to a scheme that has never been contracted out.
The conditions slightly vary depending on whether the rights being transferred are GMPs or section 9(2B) rights but, in both cases, and in very simple terms, the receiving scheme needs to provide benefits that are payable on the same basis as GMPs/ section 9(2B) rights so essentially the members' existing protections in respect of the benefits they will receive are preserved:
The amendments to the 1996 Regulations will permit a connected employer transfer in respect of GMPs from a salary related scheme to a scheme that has never been contracted out if:
- In the case of accrued rights to GMPs, the receiving scheme provides for pensions that are payable on the same basis as GMPs eg. In relation to increases, revaluation, commutation
- For GMPs already in payment, the receiving scheme needs to provide for the payment of GMPs at a rate that is no lower than the rate at which they were paid by the transferring scheme, and provide for annual increases in line with relevant provisions of the PSA93.
For section 9(2B) rights, the conditions will be that the benefits credited in the receiving scheme in respect of accrued section 9(2B) rights or pensions in payment deriving from section 9(2B) rights must be such as would have complied with section 12A(1) of the PSA93 as it had effect immediately before April 2016.In other words, the benefits provided under the receiving scheme must comply with legislative requirements/ the statutory standard for provision of benefits in respect of section 9(2B) rights. In addition, here the actuary must provide a certificate that the transfer credits in the receiving scheme are no less favourable (i.e. the usual regulation 12(3) certificate).