Effect on advice of TPR’s DB transfer suspension guidance
6 April 2020
Rachel Vahey, senior technical analyst at AJ Bell, looks at how the recent guidance from The Pension Regulator on suspending DB transfers in the current crisis might impact advice given to clients
When we popped the champagne corks on 31 December, no-one could have envisaged how 2020 is turning out. This is a difficult time for everyone, with unimaginable decisions for many.
The Covid-19 effect is reaching into almost every crevice of our lives, including pensions and savings. It affects those building up pensions, those taking pension income, and also impacts trustees and administrators looking after pension schemes.
At the end of March, The Pension Regulator (TPR) published some valuable guidance to trustees and administrators of defined benefit (DB) schemes. It was keen to emphasise the guidance didn’t overrule legislation – the TPR has no power to waive statutory duties. Nor does it affect trustees’ fiduciary duty. Instead, the TPR wanted to highlight some ‘good practice ideas’ for trustees who are facing difficult funding decisions in the current economic turmoil.
TPR will, given the Covid-19 pandemic, make allowances in its enforcement activity to help out schemes. The guidance covered a range of subjects including how trustees can approach current valuations, and that they should be open to the idea of suspending debt repair contributions.
It also addressed the issue of DB transfers. There are growing worries about the rise of scammers, and TPR warned trustees to be on the look-out for members being targeted by ‘scammers and unscrupulous financial advisers’.
To give DB trustees more grease to their elbow to stop scammers, TPR is allowing them to suspend DB transfer quotations and payments for the next three months. This usually means a breach of disclosure requirements, but TPR said it won’t take any action against trustees who suspend transfer activity. The bottom line is any individual who is currently in the throes of a DB transfer – or is considering one – may find the process abruptly halted.
As well as helping put the brakes on the number of scams, TPR is also alive to the issue that the volatility in financial markets will mean many trustees will want to review the terms they offer for transfer values, in light of the danger they disturb the cash flow of the scheme.
Suspending transfers isn’t an easy decision for trustees, and they will need advice from the scheme actuary and others. They need to protect the remaining scheme members, but it would mean denying individuals their right to transfer at a time when the member may have strong financial needs. Many people are going to face financial hardship over the next few months. Someone’s unique personal circumstances could mean the most effective way for them to access cash is a transfer out of the DB scheme.
If that’s the case, then the individual will not welcome trustees putting a stop to transfers. Especially if whilst the member waits the transfer value falls considerably, or the employer goes bust and the scheme falls into the arms of the PPF (pension protection fund).
TPR isn’t issuing regulations. It’s up to the trustees what they want to do, and they don’t have to suspend transfers. It’s not clear yet how many will do so. But trustees don’t necessarily need to make the decision immediately. Even if a request to transfer starts now, then the trustees could halt all transfers in progress in a few weeks’ time when they have had chance to properly consider the situation.
Advice firms working on transfer cases will need to contact trustees to find out their approach. But getting this clarity from trustees just creates another step in an already-complex transfer process, and will only put more time pressure on the ability to complete transfers within the set timescales.
This comes at a time for advisers when the FCA has delayed its policy statement on advice on DB transfers until much later in the year. This was due out imminently, and promised to tackle once and for all the question of whether contingent charging was allowed. It was also likely to introduce a new form of advice – abridged advice – which could have helped more clients access advice around their DB transfer.
We can be sure the FCA will continue to closely monitor adviser firms’ activity on DB transfers, especially given the vulnerability that some customers will face over the next few months. And well documented files are going to be key.
TPR has said these new measures for DB schemes will remain in place until at least 30 June 2020, and that it would review this date as things progress.
There is no doubt that there are many tough decisions to be made over the next few months for trustees, members and advisers. And this is made more difficult in the absence of a set timeline of when things will get back to ‘normal’. But many members may find the option of a DB transfer is – for the moment – denied them.
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