Oracle Express - Pensions Regulator guidance on COVID-19
The pension regulator has been issuing guidance to trustees, administrators and sponsoring employers of DB pension schemes in response to the Covid-19 outbreak. This has been picked up in the trade press.
This is in response to the market movements during the current Covid-19 crisis. Amongst other things, investment returns and bond/gilt yields are a key factor in schemes calculation of transfer values and assessing their funding position.
Due to circumstances DB schemes have many issues to deal with at a scheme level, that frankly put the needs of an individual wishing to transfer down the priority list. They have to deal with issues such as:
- getting their valuations correct,
- ensuring they are getting accurate values for their investments,
- assessing any new risks that may materialise,
- assessing commutation and / or early retirement factors,
- validating previous risk based decision,
- dealing with employers wanting to defer scheme contributions,
- assessing the strength of their employer covenant.,
- potentially increased transfer out requests, etc,
The regulator has two main concerns:
- There is scope that the current crisis could see an increase in activity by scammers and “unscrupulous” financial advisers to take advantage of clients in these unprecedented times e.g. playing on fears of employers going bust and effecting the scheme
- The administrative burden placed on schemes, and uncertainty they face at this time
Schemes have specifically been advised to concentrate their administrative efforts on:
- ensuring pension payments continue to be made
- processing member retirements
- maintaining bereavement processing
It should be noted that the regulator’s pronouncements are just guidance and are not legally binding. Trustees can decide themselves how to deal with their schemes at this time, as they still have a duty of care to members and consideration to be taken of relevant legislation and scheme rules.
Presently, scheme members have a statutory right to transfer unless they are an active member, or if they are within 12 months of the schemes normal retirement age.
Under existing rules trustees must provide a Cash Equivalent Transfer Value (CETV) within three months of the member requesting this, and then the member has three months to accept this from a guaranteed date. The transfer must be completed within 6 months of the guarantee date, effectively 3 months from the quote expiry, so it looks like this could now be up to 9 months from the guarantee date.
Full timeline is covered in the links at the end.
In respect of transfer values the announcements were:
- Trustees should give greater attention to the heightened risk of members being targeted by scammers and unscrupulous financial advisers.
- Trustees may decide to suspend cash equivalent transfer value (CETV) quotations and payments to give themselves time to review CETV terms and/or to assess the administrative impact of any increase in demand for CETV quotes.
- This may mean a breach of disclosure requirements. tPR cannot waive an obligation to report the breach to them , but they won’t take regulatory action in the next three months against trustees who suspend CETV activity.
- After three months, trustees may decide to continue with the CETV suspension or delayed quotation if this is still in the best interests of their members. However, they should be clear on the reasons to do so and they should notify us.
As you can see there is no ban on DB transfers and no freeze on the right to transfer .
However, schemes may delay the provision of CETV quotes and the making of transfer payments by 3 months. And potentially to delay further at the end of the 3 months.
The decision to use these flexibilities is a legal minefield for trustees and their funding position is highly complex involving many assumptions that may need amended or revalidated.
It may well take time for any decisions to be made.
What does it mean?
Expectations will need to be managed for those in or entering the DB transfer process. Particularly, those clients who are waiting on, or may be relying on, their DB benefits to fulfil their capital or income needs They may have some time to wait.
It will be interesting to see if schemes pausing CETV payments subsequently reduce them if they are assessed to be underfunded (as they are currently entitled to do).
Like everyone else, these are severely trying times for scheme trustees and administrators.
Dealing with requests for information and providing or paying transfer values may not be high on the list of priorities. Chasing information, quotes or payments is likely to be the last thing that schemes will need to be dealing with at this time.
Of course, schemes responses, admin burden and approach will all be different. It’s entirely possible some schemes will operate as normal and some will have delays and / or reduced values.
At the end of the day, DB transfer advice is, or should be, bespoke to the individual. The challenge for advisers will need to make sure they take account of circumstances for each individual scheme when giving advice and ensuring they act in their customers best interests as the FCA require at all times. If a CETV changes then they’ll presumably reassess advice already given.
The average time for a DB transfer is around 6 months. Could this mean it could be as long as 9 months or more to get through the process?
ARTICLE by The Technical Team
scheme pays Q&A
Answers to common questions on using the Scheme Pays option to meet annual allowance excess charges
ARTICLE by The Technical Team
Tax-free cash and protection
Information on tax-free cash (TFC) and how it can be protected; the type of Lifetime Allowance protection held can also impact the calculation of the maximum TFC.
ARTICLE by The Technical Team
Annual allowance for pension savings
A review of the main changes to annual allowance since its introduction on 6 April 2006, as well as common issues to consider.