Transfer requests, either at the point of leaving pensionable service or at a later date, can give rise to a variety of potential errors and complaints – in fact, transfers are one of the most frequent sources of complaint to the Ombudsman. Here, we look at some of the key principles when handling transfer requests.
What rights does the member have?
When a member leaves pensionable service (either by leaving employment, or by opting out of pension scheme membership while still in employment), the member gains certain rights and options, including in many cases the right to transfer their benefits to another scheme or arrangement. Broadly, the statutory rights and options available to a member will depend on whether they have accrued rights to uncrystallised benefits in a particular category (for example, defined benefit (DB) or defined contribution (DC) benefits) and have stopped accruing benefits in that category. However, there are plans to restrict current statutory transfer rights, given concerns about some transferring members being victims of scams.
Scheme rules may also provide for transfers in wider circumstances than those set out in law.
Getting the timing right
In DB schemes, members have a right to apply once in any 12-month period for a written statement of entitlement of the amount of their accrued benefits, valued as at a ‘guarantee date’. Trustees are then responsible for calculating an initial cash equivalent value, according to statutory rules. The guarantee date is a key date for the rest of the process; it must normally be within three months of the member’s application, and the member has three months from the guarantee date to apply for a transfer, identifying one or more receiving arrangements. To read more about checking the receiving arrangement, visit www.allenovery.com/pensionliberation. Trustees must make the transfer payment within six months of the guarantee date.
DC members have a similar right to information about cash equivalents and transfer values, which trustees must provide within three months of the member’s application. Payment must be made, where relevant, within six months of the member’s application.
A delay in dealing with a transfer request exposes a member to the risk that their transfer value will be worth less than expected, so trustees should deal with the processes promptly. If maladministration leads to unnecessary delay, even within statutory deadlines, trustees may be liable for any resulting losses – for example, investment losses suffered by a member (click here to read more about a significant award made recently by the Pensions Ombudsman). The Pensions Regulator (TPR) has also warned that internal processes such as trustee sign-off should not delay the transfer process. Trustees may need to act more quickly than normal where an individual’s circumstances justify this. In July 2019, an industry working group released ‘best practice’ guidance on transfers that is intended to reduce delays. The guidance focuses on DB transfers, but schemes are encouraged to apply the principles more widely, including on DC‑DC transfers.
Where a delay is unavoidable, trustees should keep the member informed. In one case,1 trustees were waiting for advice about the equalisation of benefits and rate of indexation provided by the scheme, as well as for the outcome of a GMP reconciliation exercise, before providing a quotation. Although the Pensions Ombudsman considered this to be a reasonable approach, the failure to keep the member informed of the reason for delay was maladministration.
In appropriate cases, trustees can request TPR to extend the six-month deadline to complete the transfer, indicating the additional time required and the reasons for delay.
Revaluation for deferred members
To protect the value of a deferred DB pension benefit in real terms from the date a member leaves pensionable service to the date their pension comes into payment, trustees are required to revalue benefits in line with cost-of-living increases, up to a set maximum. The extent of revaluation will depend on the date the member left service and on the scheme rules, which may be more generous than the statutory minimum. Getting revaluation right can be complex: the statutory minimum requirements have changed several times over the years, and scheme rules may also have been amended. It’s important to ensure that service dates and other key data items are correct and that the administrators know the applicable revaluation rules for specific types of member and for relevant periods of service.
In the DC context, revaluation is easier, since it will consist of the investment yield and any bonuses on the member’s account from the date of leaving service, less an amount which can be deducted for administration. The cash equivalent will be the value of the member’s account at the date of calculation.
Calculating transfer values
In practice, the scheme administrator will normally calculate transfer values, but trustees should ensure that there is a review mechanism to check that calculations are being carried out correctly – this could involve asking the actuary to carry out spot checks on calculations, or to be a second pair of eyes on high-value transfer calculations. Mistakes can be costly and time-consuming to sort out, so it’s important to check that systems are working properly.
Trustees should also be aware that a recent High Court decision, in the context of GMP equalisation, has considered issues around correcting past transfer payments. The judge concluded that where a statutory transfer value was underpaid because it did not account for equalisation, trustees did not properly perform their statutory duty, and were not discharged under legislation from the obligation to pay a correctly calculated cash equivalent. Click here to read more about the court’s findings in relation to statutory, and non-statutory, transfers.
Advice and risk warnings
Since April 2015, trustees have been required to perform an additional check on transfers of ‘safeguarded benefits’ worth more than £30,000 where the member is acquiring flexible benefits (such as a DB-DC transfer). Trustees must check that the member has obtained appropriate independent advice on the transfer from an adviser specifically authorised to provide this. Trustees do not need to see the content of the advice, but they must obtain a statement confirming it has been provided before progressing the transfer.
Since April 2018, trustees have been required to provide personalised risk warnings for ‘safeguarded-flexible benefits’ in certain circumstances, including in relation to transfers. The obligation to provide a risk warning, and its timing, depend on the circumstances.
Schemes also routinely provide information about the risk of pension scams in response to transfer requests – TPR currently expects DB schemes to issue a template letter to members in response to all requests for a transfer value. To read more about pension scams, visit www.allenovery.com/pensionliberation.
Keeping members informed
It’s always good practice to keep members informed of the progress of their transfer – but make sure that the information provided is accurate. In another recent case,2 an administrator responded to a query from a member with a generic response which led the member to believe that her transfer would proceed, when in fact the receiving scheme was ineligible and the trustees refused to make the transfer payment. The status of a member’s request should be checked carefully before responding to a query. Trustees should also be clear about who is responsible for chasing progress with the other scheme; occasionally schemes have been found at fault where they appeared to offer to do this but failed to take active steps on behalf of the member.
Where a member has exercised a statutory right to transfer a cash equivalent, trustees are discharged from further liability to the member in respect of the benefits transferred (although the member may retain other rights in the scheme, for example the right to a guaranteed minimum pension which has not been transferred out). However, as mentioned above, the High Court has ruled (in the context of GMP equalisation) that trustees cannot rely on this discharge as against a member if the value shown in the statement of entitlement is incorrect. The Pensions Ombudsman has also previously determined that trustees could not rely on the statutory discharge where there had been inadequate due diligence and scam warnings. Trustees should take legal advice on this issue, if appropriate. Where a member has transferred out under the scheme rules (rather than in exercise of their statutory right), trustees should obtain a specific discharge from the member and ensure that this protects them against future claims.
2 Ms P (2016).