A survey of 800 advisers carried out by pension provider, Royal London, and actuaries, Lane Clark & Peacock found that 60% strongly supported the option of a partial transfer for clients. This survey confirmed similar views expressed previously by other firms, including Standard Life, LV and Aegon, and a variety of industry pundits. It is easy to see why many in the industry are keen to see partial transfers as a standard option in defined benefit schemes.
Such an option would help advisers who increasingly find themselves having to make Solomon like judgements of suitability where a client has a genuine need say, to raise a cash sum immediately but whose best interest in the longer term might be to retain the valuable scheme benefits, perhaps because they have a low end attitude to risk that would suggest that the impact of the client taking on the entire investment risk from the scheme is arguably too big a price to pay for the immediate gratification of raising cash. A partial transfer option would enable clients who wish to take advantage of pension freedoms to release cash from their pension pot to do so without being forced to 'early retire' or losing 100% of the guarantees provided by their safeguarded benefits scheme.
So, it seems like a great idea. However, it is reckoned that only around 15% of schemes currently offer a partial DB transfer option. We asked Paul Clark of pensions technical consultancy, Russeldene Consulting, for his thoughts.
Paul Clark ...
This is an interesting area. In April 2015, the Pensions Regulator (TPR) issued 'Regulatory Guidance: DB to DC transfers and conversions' which included the following paragraphs:
"Part 4ZA of the Pension Schemes Act 1993
24. Where trustees consider it appropriate to include such options we would generally expect consistency of approach with the statutory process as a means of enhancing member understanding. Trustees should consider carefully non-statutory options offered by the scheme and may need to take advice on the implications (including whether there are any overriding statutory requirements, for example in relation to contracted-out rights). If such options are made available it will be important to understand demands on the scheme’s liquidity and investment strategy, the employer appetite and the administrative practicality of doing so.
Whilst the FCA has not yet clarified its position on partial transfers, it must be expected in due course. Can advisers simply ignore this potential option when advising a client on a CETV? It is my view that each CETV request should explore whether the deferred scheme member can be offered a partial transfer."
Partial transfers in a bit more detail
Part 4ZA of the Pension Schemes Act 1993 set out the rules in respect of a deferred scheme member’s statutory right to a cash equivalent transfer value (CETV). The way the legislation is drafted is broadly interpreted as meaning that “whilst an individual has a statutory right to transfer all his accrued benefits out of a scheme, that does not mean he has a statutory right to transfer only a part of his benefits out of a scheme.”
Clearly, TPR’s view is that in some instances the scheme’s trust deed and rules may not allow for a partial transfer of retained benefits, but where this is not the case, it would seem they would look favourably on trustees who allowed partial transfers.
It is worth pointing out, that transfers of GMP must either be all the GMP transferred or none of the GMP transferred.
Why might it be in the scheme’s best interests?
DB schemes are currently focussing on the seemingly ever-increasing liabilities of their DB promises. This is also focusing the minds of sponsoring employers who represent the “money-tree” standing behind the DB promises made in the past. As a rule, sponsoring employers tend to look positively on deferred members transferring out of their DB schemes as it reduces the future uncertainty around funding and costs. In simple terms, it crystallises the employer’s liability at the point in time in which the CETV is taken and it takes away any uncertainty of how that liability may change in the future. Finance directors of sponsoring employers are often happier with a known cost today as opposed to an unknown cost tomorrow. Whilst that future cost could be less than the current cost, experience tells them it always seems to be higher! So, for a sponsoring employer, whilst discharging itself of responsibility for all a former employee’s pension liabilities may be the best solution, it is better to be able to discharge some of the liabilities whilst retaining some, if the alternative is to retain all the liability.
Strictly speaking, that is to the employer’s advantage and not the scheme's. However, the scheme is interested in being able to meet its on-going benefit promises. Reducing liabilities means the scheme is more likely, in the longer-term, to be able to meet the benefit promises of its remaining members. So, once again, a partial transfer may be a preferable position to the scheme than no transfer at all.
The trustees must also act in the interests of all their scheme members. Where in the past the general regulatory expectation has been that it is never in a member’s best interests to transfer out of a DB scheme, since April 2015 that dogmatic stance is slowly beginning to change, albeit with some regulators faster than others! It is a valid argument to say that a partial transfer may be in most members best interests. It provides them with some “guarantees” and some flexibility, potentially the best of both worlds.
Why might it be in the member’s best interests?
To some extent, this has already been addressed in the previous paragraph. For many individuals, the secure income offered by the State Pension is insufficient to cover off all their entire day-to-day retirement income needs, but a £12,000 p.a. DB pension on top of the State Pension might well give them more than they need. Taking the full CETV may mean they are taking on a higher level of risk than sits comfortably with their capacity for loss, but not taking the CETV does not provide them with the income flexibility or access to cash they desire.
Many clients can achieve their objectives without considering a partial transfer. Maybe they have two or more deferred DB schemes, so they can transfer one and retain the other. It may well be their spouse/partner also has some DB pensions and so maybe you transfer one of the couple’s two DB schemes, leaving the other; of course, that pre-supposes the couple are prepared to consider themselves two halves of a whole.
However, if this is not the case and the scheme administrator’s initial response to the request is to decline a partial transfer, where does that leave the client/member? There are many “buttons that can be pressed” to get the decision looked at properly, including asking:
- The scheme administrators to provide the extract from the scheme's trust deed and rules that specifically prohibits partial transfers, or to confirm that it is only the scheme's current practice to turn down such requests.
- For details of the number of transfer requests received for partial transfers since TPR’s April 2015 regulatory guidance and how many requests for other non-statutory transfers have been granted (i.e. once the member is within 12 months of the scheme’s normal pension age or has past the scheme’s NPA)? Whilst the member only has a statutory right to a full transfer as opposed to a partial transfer, trustees have to treat all members fairly, to grant some non-statutory transfers and not others is not in accordance with general trust law.
- For copies of minutes of trustee meetings that have taken place where they have considered and discussed TPR’s regulatory guidance on partial transfers and also copies (or summaries) of the professional advice they have taken on the matter and the impact it would have on scheme funding, i.e. whether it would be beneficial, neutral or negative to the ongoing scheme funding and therefore to the detriment or otherwise of remaining scheme members.
Depending upon how co-operative the scheme administrator is, and also their responses, it is worth also asking for a copy of the scheme’s “internal disputes resolution procedure” (IDRP) with a view to getting that matter passed to the scheme trustees to look at (often in my experience it is the scheme administrators who are causing the blockage and not the trustees). Ultimately, triggering the IRDP allows the complaint to be escalated to the Pensions Ombudsman for adjudication.
We would add our weight to the increasing demands for partial transfers to be more widely available or indeed a standard option within all defined benefit schemes. It is clear, from comments published by representatives of pension schemes, that partial transfers are not just as simple as first appears as the scheme would have to operate a different process to ensure that remaining benefits are dealt with correctly in terms of escalation etc. Yet, the mechanisms for partial transfers already exist in relation to dealing with pension splitting for divorcing members so it is far from impossible. Ideally, the Government would pick this up and change the rules to require partial transfers to be a standard option in all DB schemes but we know that the Green Paper published for consultation in February 2017 did not mention partial transfers. There is separate consideration being given to combatting pension scams and protecting people from inappropriate use of pension freedoms so perhaps the concept will arise from that work.
Meantime, as Paul has stated, there is nothing essentially preventing schemes from offering a partial transfer. Maybe an increase in demand will make Trustees take notice and will result in more schemes offering the facility.
As a matter of suitability, advisers should now, in our view, always ask whether the scheme will allow or consider a partial transfer in order to satisfy those clients who do need to access some, but not all, of their benefits and to answer the compliance question, "Did the adviser consider all other options?".
Action Required By You
- Ensure that you identify whether a partial transfer is available;
- If not, consider pushing the Trustees to make it available;
- Where a partial transfer is available, consider whether that would be the most suitable option for your client to take at this time;
- Contact your normal ATEB consultant for more guidance, or click here;
- Contact Paul Clark direct if you would like any pension technical advice.