HR departments are now faced with an important task of communicating available transfer options to members and ensuring they do not become victims of scammers trying to take advantage of the new system.
What rights can be transferred?
Members have a statutory right to transfer their DB schemes within 12 months of their normal pension date and, by discretion, at any time until retirement. DC funds can be transferred at any time.
If a member has more than one category of benefit within the scheme, for example DB and DC, partial transfers are possible, so long as the member transfers each category of benefit in its entirety.
It is also possible to convert benefits within the same scheme, for example DB to DC, but members have no statutory right to request such a conversion – nor are trustees able to effect such transactions without member consent.
Communicating the pension transfer options
Employees’ pension transfer options need to be communicated with care, especially where DB rights are concerned. All DB to DC transfers, whether within the scheme or to a third party arrangement, constitute a regulated activity and there is now a legal requirement that the member takes independent advice before such a transfer can go ahead.
There are two main issues that need to be communicated and explained to employees – what are the new options available and what is the extent to which the scheme facilitates them. If the scheme does not provide members with options that are now legally possible there could be an increased demand for pension transfer requests, especially from those at or near retirement.
Protecting employees from fraud
HR departments need to ensure their employees are as informed as possible to prevent them from making decisions that could seriously damage their pensions. The main line of protection for members is the pension scheme trustee. The Pensions Regulator has recently provided detailed guidance on how trustees should undertake their duties in this regard.
However, HR departments can increase awareness about the prevalence of pension scams by making information about the subject available in the workplace, on the intranet, enclosures with payslips etc. This should include how to spot a scam and the various organisations from which guidance can be sought (TPAS, Pension Wise, Action Fraud).
Due diligence transfer process
There has always been a statutory framework within which trustees must process transfer requests, and there is now a further requirement to ensure members who wish to transfer have taken advice. Trustees are required to check that the adviser used by the member has the necessary FCA permissions to advise on transfers. Trustees must also maintain a record of who conducted the check and when.
The difficulty with the statutory due diligence framework is that the assessment is essentially quantitative. For example, although trustees need to ensure that advice is taken, they are not required to assess the advice nor second-guess members’ motives.
To help address this the pensions industry has developed a Code of Practice to help members, employers, trustees and their administrators spot potential scams. The voluntary Code goes beyond the statutory requirements and aims to increase member awareness (for example, by including the Pension Regulator’s booklet on pension scams within each transfer pack); increase protection through a more qualitative assessment of the receiving scheme; and to circulate knowledge of current scam strategies so that administrators are more alert to the potential for fraud.
Eamonn O'Connor is director of independent investment advisers City Noble