Pensions briefing - DC Bulk Transfers - New without consent regime

Publication | June 2018

Introduction

In April 2018, the Department for Work and Pensions (DWP) released guidance for trustees on the new regime for bulk transfers between trust arrangements offering ‘pure’ money purchase or defined contribution (DC) benefits. This follows the coming into force on April 6, 2018 of amendments to the Occupational Pension Schemes (Preservation of Benefits) Regulations 1991 (the Preservation Regulations). These changes represent the culmination of a long-standing regulatory objective to facilitate the consolidation of small DC trust arrangements to improve the management, governance and efficiency of vehicles offering DC pension benefits.

There are many reasons why employers and trustees might seek to transfer their DC schemes to other arrangements and this briefing looks at the reasons for this becoming an area of increased interest in the pensions industry and how the new legal framework facilitates this process.

Background – why is so much change afoot?

The gradual shift from defined benefit (DB) pension provision to DC provision amongst UK employers is continuing, with the Regulator reporting in 2017 that DC savings had for the first time overtaken DB pension saving. In its presentation of scheme return data for 2016/2017, the Pensions Regulator (the Regulator) reported that there were around 34,500 schemes in the UK with DC trust based members providing benefits to 4.4 million active members. Some 32,000 of these members were in so called ‘micro-schemes’ with between two and 11 members. With the advent of auto-enrolment in 2012 and more and more employers closing their legacy DB schemes to accrual, it is inevitable that this trend will continue for the foreseeable future.

In addition to the introduction of auto-enrolment in 2012,  wholesale change in the DC landscape in recent years includes the introduction of ‘freedom & choice’ flexibilities in 2015 and the drive to improve governance, specifically of DC arrangements through multiple legislative and regulatory initiatives. As such, more employers are assessing their offerings to ensure they remain fit for purpose. The world has changed enormously and so too have the expectations of: members in what benefits they receive; employers in the remuneration and benefits packages they wish to offer; and the Regulator in what it expects in terms of providing DC benefits which are sustainable and offer good value for money for workers.

This has been overlaid with an increased regulatory and legislative scrutiny on DC provision, coinciding with the emergence of master trust vehicles in the UK as a collective vehicle to provide DC benefits.

DC transfers – what’s the appeal?

The appetite for transfers of DC arrangements has increased dramatically in recent years. There are several aspects to consider from a practical, business and legal perspective, but many employers and trustees responsible for small DC trusts are nevertheless seeking to close existing schemes (in its response to the consultation on the 2018 Regulations in February 2018, the Regulator estimated that one third of all schemes are looking for alternatives).

In part this is due to the increased governance requirements on DC arrangements which require additional resource, professional advice and, therefore, cost, which can prove prohibitive for smaller schemes. Many employers are also aware that they cannot operate with sufficient economies of scale to ensure that they are providing  the best possible offering to their scheme members. Many existing DC vehicles were established in simpler regulatory times and require evolution (or in some cases revolution).  Employers may also have other reasons for seeking to transfer or merge their DC schemes as a result of corporate consolidations or commercial transactions and the outsourcing of governance associated with running a DC trust is often an appealing option.

Master trusts – the white knight?

Since auto-enrolment was introduced in 2012, the UK master trust industry has taken off with around 90 master trusts having registered with the Regulator providing benefits for 7 million DC members and with approximately £10 billion of assets under management (according to the Regulator’s scheme return data for 2016-2017). A relatively new feature of the UK pensions landscape, master trusts are a form of multi-employer occupational pension scheme established under trust and intended for unconnected employers. Initially purpose built for small employers to enable auto-enrolment compliance, larger master trusts now provide an attractive option to all employers seeking to find a home for their DC arrangements.

Given the rapid emergence of master trusts as a key player in the industry and initial low barriers to entry into the master trust market, the Regulator has taken steps to ensure that master trusts are appropriately and robustly regulated. This has resulted in new regime to be implemented from October 1, 2018, under the Pensions Schemes Act 2017, which amongst other things requires specific regulatory authorisation, submission to stringent supervisory and monitoring requirements and evidence of appropriate governance and financial sustainability over the long-term.

Appropriately regulated master trusts give many employers and trustees confidence that they can validly outsource their DC governance to an appropriate vehicle which can often offer economies of scale, the ability to evolve with member needs and in many cases a wider range of de-cumulation options. Of course, whilst likely to be the most popular option to receive a DC transfer, it will remain possible to combine one or more traditional DC schemes.

Mechanics of a DC to DC bulk transfer

Until the recent changes, DC transfers had to be effected under the general pension bulk transfer framework set out under Regulation 12 of the Preservation Regulations. These enabled a bulk transfer of DC benefits without consent subject to conditions, broadly including:

  • actuarial certification that receiving scheme rights are ‘broadly no less favourable’;
  • a requirement for a relationship between the transferring and receiving schemes (e.g. by reference to the employers or a transaction); and
  • one month’s advance notice for the transferring members.

This framework was originally created with DB transfers in mind and caused compliance difficulties, particular due to the lack of consensus on the meaning of ‘broadly no less favourable’ in a DC context and the fact that the requirement for actuarial involvement made little practical sense, simply adding cost where ‘pure’ DC benefits were transferring.

For this reason, the DWP acknowledged that the Preservation Regulations requirements were acting as a barrier to consolidation and, so following a Call for Evidence published in December 2016 and a subsequent consultation exercise in October 2017, the regime was overhauled in respect of DC transfers.

The Occupational Pension Schemes (Preservation of Benefit and Charges and Governance) (Amendment) Regulations 2018 (the 2018 Regulations)

The 2018 Regulations introduced amendments to the Preservation Regulations to simplify the transfer process for ‘relevant money purchase benefits’ (which are effectively ‘pure’ DC benefits with no associated guarantees or promises such as a guaranteed annuity rate or specified annual return).

Broadly, such rights can be transferred to another occupational pension scheme without the consent of members where one of the following conditions is satisfied:

  • the receiving scheme is an authorised master trust; or
  • the transferring and receiving employer are in the same corporate group; or
  • the trustees of the transferring scheme have obtained advice from an ‘appropriate independent adviser’ (this need not necessarily be an actuary and the 2018 Regulation stipulate the factors trustees must take into account in assessing whether an adviser meets these requirements, including the level of expertise and the extent to which the adviser may have recently provided services to the receiving scheme ).

This regime is now in force and will run in parallel to the existing framework until September 30,  2019, after which point it will no longer be possible to use the previous transfer process to transfer ‘relevant money purchase benefits’.

A brave new world?

The new regime offers trustees and employers who wish to find a better home for their DC trusts,  a much more straight-forward route to consolidation. However, the new regime should not be viewed as a panacea to allow DC trust operators to simply unburden themselves of a DC trust which has become difficult to run.

A key component in any bulk DC transfer will be due diligence on the receiving scheme. The transferring trustees’ fiduciary obligations to act in the best interests of their members will continue to apply before they make what will typically be their biggest ever decision in relation to their scheme. As the regime permits the transfer to be made without consent, trustees will need to be mindful that their ultimate goal in making the transfer will be to improve member outcomes. The guidance notes that, whilst member consent is not required under the new regime, the communication of the decision to members and the reasons for it will be a key element of any transfer process.

Before reaching a decision to transfer, trustees (and employers) will want to understand the structure and benefits to be provided by the receiving scheme. Professional advisers will be able to assist trustees in analysing the receiving scheme and will need to do so if the ‘appropriate independent advice route’ is chosen by trustees.

Once the authorised master trust regime comes into effect on October 1, 2018, there will be no requirement to seek independent advice before a transfer to such a scheme (as the regulatory regime includes minimum standards for governance and administration etc.). However, whilst it is not a statutory requirement, the Regulator has provided in its guidance that that trustees may still wish to consider independent advice on an intra-group or master trust transfer too, so it is clear that the Regulator expects trustees to be making fully informed decisions.

The future

The regulatory guidance is a useful manual for trustees to follow if a DC transfer is being considered. It sets out a number of areas of good practice and its expectations of those considering a switch, and makes clear that trustees’ fiduciary responsibilities are paramount before embarking on a transfer. It sets out key considerations ranging from communications to members, scheme data quality, the legal documentation required to effect the transfer and how the transition itself should be managed.

Inevitably, there are also a number of potential pitfalls to be aware of and thorough preparation for a transfer will be crucial. Trustees will need to consider, amongst other things, whether consultation with members may be required (e.g. if the transferring scheme is still open to accrual), that no guarantees or promises are built into their existing benefit structure and also to ensure that no valuable member tax benefits may be lost as a result of any transfer. 

We expect that DC consolidation will continue as regulation and experience of the master trust industry evolves and,  in that context, the new regime offers many small DC trust operators a welcome opportunity to avail themselves of the experience and expertise of larger industry players. 

The changes to the DC bulk transfer regime simplify the process for transferring DC benefits and are, therefore, clearly an important step on the path to the Regulator’s stated ambition to achieve consolidation of small DC trusts in order to improve governance and, ultimately member outcomes.


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Contacts

Peter Ford

Peter Ford

London