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The Pensions Regulator (TPR) estimates that 100,000 transfers out of defined benefit (DB) schemes took place in the 2017/18 financial year1. The Office for National Statistics (ONS) has published figures showing that £34bn was transferred out of occupational pension funds in 2017, a massive increase on the £13bn that was transferred out in each of the two previous years, with a record £10.6bn being transferred out just in the first quarter of 20182.

It is clear that pension schemes are experiencing a greater demand for transfers out than at any point in their history.

The key drivers for this trend have been the continuing high level of DB transfer values (as shown by the XPS Pensions Group Transfer Value Index) and the desire of members to be able to transfer out to access the flexibility available in defined contribution (DC) schemes. It is also possible that the number of ‘bad news’ stories about DB pensions, from BHS to Carillion, have contributed to some ‘rogue’ advisers seeking to encourage members to transfer out. Post ‘freedom and choice’, transferring out may sometimes be the right decision for DB pension scheme members who want to access the flexibility available in a DC arrangement, but there are risks of members being poorly advised, and even transferring their benefits into scam vehicles.

In this issueHow can trustees ensure that members make good transfer decisions?- Speed read

Regular features- In conversation with...- Other recent

developments- Publications

round-up- Key dates this quarter

06/2018

How can trustees ensure that members make good transfer decisions?In the first issue of our new-look XPS Pension News, we look at how trustees should respond to the current demand for transfers out of defined benefit schemes, and what actions they can take to minimise the risk of members making poor decisions.

XPS Pensions NewsBringing you the latest news, insights and opinion from across the pensions industry

1 http://www.thepensionsregulator.gov.uk/foi/number-of-transfers-out-of-db-schemes-in-2017-18.aspx

2 https://www.ons.gov.uk/economy/investmentspensionsandtrusts/datasets/mq5investmentbyinsurancecompaniespensionfundsandtrusts

Speed read- Many schemes are

seeing high levels of transfer activity as a result of historically high transfer values and the opportunity to access flexibility via transfer to a DC scheme

- TPR has asked trustees to keep records of transfer activity, including details of advisers and receiving schemes

- Trustees should have rigorous processes in place to check whether transfers are legitimate

- Trustees may also wish to review how they communicate the option to transfer to members

In its latest annual funding statement, TPR notes the current transfer trend and asks trustees to keep records of transfer activity, including details of the advisers and the schemes to which transfers are made. For example, in some cases, trustees may find that a large number of transfers are being advised on by the same adviser, or are being made to the same scheme. Whilst these factors are not necessarily indicators of scam activity, it could indicate a pattern that trustees should be aware of. TPR asks trustees to contact it or the FCA if they have concerns over the level of transfer activity or the quality of the advice being given to members.

As trustees are effectively being put into the position of transfer watchdogs, what actions should they (and their administrators) be taking? As a minimum:• Check that transfers are being made

to genuine occupational pension schemes, private pension providers or master trusts.

• Check that any members with a transfer value in excess of £30,000 have received independent financial advice from an FCA-authorised adviser with permission to advise on pension transfers.

XPS Pensions Group

• Where these checks raise concerns, contact members to ask further questions about the circumstances of the transfer request.

• Monitor transfer activity and report any concerns to Action Fraud, the FCA and/or TPR where appropriate.

XPS Pensions Group Transfer Value Index Since June 2016

A key part of my role is to monitor all the latest pensions developments, and make sure that these are communicated to clients and colleagues in a clear and timely way. We produce frequent briefing notes on current hot topics as well as our new quarterly bulletin ‘XPS Pensions News’, which rounds up recent trends and developments over the last quarter and looks forward to forthcoming events over the next few months. Please do let me know if you have any comments on our publications!

I’m currently looking at DWP’s consultation on new powers for TPR and am also eagerly anticipating the other consultations we can expect to follow on from the DB White Paper (on the funding code of practice and on consolidation). And, as someone who has watched the development of the IORP II directive from its very beginning (when it threatened to impose substantial additional solvency requirements on DB schemes), I shall be very interested to see how the Government finally implements the directive in the UK, especially in the context of the UK’s imminent departure from the EU.

Jane Beverley Head of Research

In conversation with...

t

e

020 3327 5000

jane.beverley @xpsgroup.co.uk

However, even where the first two checks are passed, trustees should consider whether further investigation is needed.

XPS Pension Group’s scam identification service, which conducts a short telephone interview with members who opt to transfer, has identified signs of scam activity in 1 out of 8 transfer requests reviewed over the past 12 months. The latest version of ‘Combating pension scams: A code of good practice’, published in June 2018, encourages trustees, providers or administrators to make an early telephone call to members to help identify the circumstances of the transfer request and hence any cases where further due diligence may be needed.

Ultimately, if the member has a statutory right to a transfer, the trustees have verified that the receiving scheme appears to be a genuine occupational pension scheme, and the member is determined to proceed, under current legislation the trustees have little option but to proceed with the transfer. However, having the right processes in place

to check whether the transfer is legitimate will help to reduce the risks for both trustees and for pension scheme members.

Trustees can also help to minimise the risk of poor transfer decisions by ensuring that members have access to the right information to help them decide. Initially, after the pension freedoms, many trustees were reluctant even to mention in retirement packs that members might have an option to transfer their DB funds out of the scheme to access DC flexibility. Over time, this picture seems to have changed with many trustees now recognising that more of their members may value increased flexibility and so preferring to communicate details of the transfer option alongside the full range of options at retirement, including full pension, cash or trivial commutation, pension increase exchanges, additional spouse’s pensions etc. That will make it harder for unscrupulous advisers to suggest that the option to transfer is being ‘hidden’ from them in some way, and means that members will have access to high quality information from the trustees on the transfer option.

Good processes and clear communications are the key to trustees ensuring they carry out their duties effectively and protect their members from poor transfer decisions.

Other recent developmentsFinancial Guidance and Claims Act 2018On 10 May 2018, the Financial Guidance and Claims Act 2018 became law. The Act provides for the creation of a new single financial guidance body to replace the three existing guidance services (the Money Advice Service, the Pensions Advisory Service and Pension Wise).

There will be a new requirement for trustees and providers to refer individuals to appropriate pensions guidance before they can transfer or access their benefits. This will not just be a case of ‘signposting’ members to guidance: members will have to confirm they have either received or opted out of receiving the guidance before they can proceed.

The Act also enables the Government to make regulations to ban cold-calling in relation to pensions, which are expected to be introduced by the end of June 2018.

Anti-money laundering requirements: changes to registration processNew money laundering regulations, which came into force on 26 June 2017, impose requirements on trustees to keep information on their pension scheme membership and (in limited circumstances) to provide this to HMRC by 31 January each year via the Trusts Registration Service (TRS).

For the small number of pension schemes that were required to use this service, HMRC have amended their guidance to indicate that scheme trustees do not need to register separately on TRS; instead they can update their details by contacting HMRC Pension Scheme Services.

TPR’s guidance on cyber security and risk managementIn April, TPR issued guidance on cyber security, which sets out what trustees should do to minimise any loss, disruption or damage to the scheme or its members from a failure of its information technology systems or processes. The guidance covers internal and external risks to data security as well as to the security of scheme assets. TPR urges trustees to take steps to build up their scheme’s resilience to cyber threats, for example by operating adequate internal controls. As cyber risk is continually evolving, trustees should ensure their controls, processes and response plans are tested and reviewed regularly.

The importance of good risk management is also the subject of TPR’s latest tranche of guidance in its 21st century trusteeship campaign.

Guidance on DC bulk transfers without consentNew regulations, which came into force on 6 April 2018, make it easier for trustees to make bulk transfers of DC benefits without member consent. The legislation replaces the requirement to obtain an actuarial certificate with new member protections.

To support trustees, the Government has issued non-statutory guidance which sets out the factors to consider when taking advice from an appropriate adviser and how to determine the adviser’s independence from the receiving scheme. The guidance also provides the DWP’s views on good practice regarding member communication, data quality, documentation and safeguards to ensure that members who were protected by the charge cap or have valuable tax protections do not lose out as a result of a transfer without consent.

Possible changes to PPF compensation limits?In a case referred to the European Court of Justice (CJEU) by the Court of Appeal in July 2016, the Advocate General has given her opinion that the amount of compensation payable by the Pension Protection Fund (PPF) in the event of employer insolvency breaches European law.

The case concerned Mr Hampshire, a former long-serving employee of Turner & Newall Ltd, who retired in 1998, at the age of 51. In July 2006, the T&N Scheme entered a PPF assessment period. As Mr Hampshire had not reached normal pension age when the company became insolvent, the PPF capped the amount of compensation to which he was entitled, which meant a 67% reduction in his pension entitlement. Mr Hampshire brought a claim against the PPF on the grounds that compensation amounting to less than 50% of a member’s accrued pension benefits is inconsistent with European law.

The CJEU’s judgment is expected later this year and the case will then return to the Court of Appeal. Whilst the CJEU is not bound to follow the Advocate General’s findings, it would be unusual for it not to do so. This means that the PPF compensation cap could be found to breach EU law (with potential consequences for past and future compensation payments). However, the exact application of the judgment to the UK may depend on the outcome of the Brexit negotiations.

Supreme Court considers definition of ‘worker’The Supreme Court has given its judgment in a recent case, Pimlico Plumbers Ltd and Another v Smith, finding that the Employment Tribunal was entitled to conclude that Mr Smith qualified as a ‘worker’ under the Employment Rights Act 1996. Whilst the case did not consider Mr Smith’s pension entitlements, it seems likely that the judgment may have implications in the context of auto-enrolment.

Publications round-up

If you have missed any of our publications since March 2018, you can find them on our website: www.xpsgroup.com.

News AlertsStrengthened powers for the Pensions RegulatorThis news alert summarises the DWP’s new consultation on changes to the notifiable events and anti-avoidance regime, as well as on increased powers for TPR.

White Paper to bring in step-change for DB pensionsThis news alert looks at the proposals in the Government’s White Paper, which could bring about the most significant changes to the DB pensions regime since the Pensions Acts 1995 and 2004.

Briefing NotesAttractive pricing opportunities for buy-in/buy-outThis briefing note explains why many schemes are approaching the buy-out market for quotations and why now might be a good time to consider a bulk annuity transaction.

Jane Beverley

To discuss any of the issues covered in this edition, please get in touch with Jane Beverley or Caroline Ekins:

te

020 3327 5000

jane.beverley@xpsgroup.co.uk

Caroline Ekins

te

0118 313 0700

caroline.ekins@xpsgroup.co.uk

Alternatively, please speak to your usual XPS Pensions contact.

@xpsgroup.com

company/xpsgroup

Welcome to the GDPR! Now that the GDPR is in force, this note looks at some recent legal and regulatory developments, and some of the questions trustees are now asking.

Are RPI’s days numbered? This briefing note looks at what the future might hold for RPI, and how likely it is to be changed or even discontinued.

TPR aims to be clearer and tougher on scheme funding This note looks at the Regulator’s latest annual funding statement, which highlights TPR’s tougher stance on scheme funding.

Does DDA mean extra options for SHPS employers? This briefing note considers whether the new Deferred Debt Arrangement (DDA) regulations could provide more options for employers in the Social Housing Pension Scheme (SHPS).

CMI 2017: the trend continues This note looks at the 2017 version of the model for projecting future improvements in longevity, released by the Continuous Mortality Investigation (CMI) in March 2018, and the impact of using this model in valuations.

Changes to DC bulk transfers without consent This briefing note looks at the DWP’s response to its October 2017 consultation on simplifying the process for DC bulk transfers without consent.

GDPR: just over two months to achieve compliance This note (issued in March) looks at recent GDPR developments and at particular issues which may be causing problems in practice.

Investment UpdatesInvestment Quarterly Update: May 2018 This bulletin provides some market commentary on developments over the last quarter, and considers the effect of recent data and policy announcements in the US on global equity markets.

xpsgroup.comJBWFJL/CEJBJL | 1806017_11

© XPS Pensions Group 2018. This communication is based on our understanding of the position as at the date shown. It should not be relied upon for detailed advice or taken as an authoritative statement of the law. XPS Pensions is a trading name and a division of Punter Southall Limited. Registered office: 11 Strand, London WC2N 5HR. Registered in England and Wales with No. 3842603. Part of XPS Pensions Group

Key dates this quarter

Event bookingBook your place on our website: www.xpsgroup.com/eventsAlternatively, for more information, get in touch with Jyothi Binu on 0117 202 0449 or email events@xpsgroup.com

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‘Spring’ 2018 DWP update on Pensions Dashboard still expected

End of June 2018?

Regulations banning cold-calling in relation to pensions could be introduced

Summer 2018? TPR expected to publish findings of thematic review of value-for-member assessments in DC schemes

Summer 2018 Financial Reporting Council due to publish revised UK Corporate Governance Code and consult on amendments to UK Stewardship Code

July 2018 Competition and Mergers Authority due to publish provisional findings of investigation into investment consultancy market

16 July 2018 Deadline for responding to DWP’s consultation on clarifying and strengthening trustees’ investment duties

9 August Deadline for responding to proposals arising from the FCA Retirement Outcomes Review on protecting consumers

21 August 2018 Deadline for responding to DWP’s consultation on a stronger pensions regulator

6 September Deadline for responding to proposals arising from the FCA Retirement Outcomes Review on consumer engagement

1 October 2018 New master trust authorisation regime comes into force

Accounting for Pensions SurveyAnalysis from XPS Pensions shows that the unprecedented levels of member transfers out seen over the last year could add £25 billion to UK companies’ accounting costs if no action is taken. New data released in 2018 shows that transfers out have increased from £12.8 billion in 2016 to £34.2 billion in 2017 – an increase of 167%.

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Accounting for PensionsReflecting the cost of pension freedoms

and life expectancyApril 2018

Events

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Masterclass: Market Volatility and Cashflow Driven Investing – What it means for your Strategy

12 July 2018

06 Sept 2018

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Trustee Training: Understanding LDI

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Valuation Masterclass: Overcoming the challenges for Pension Scheme Funding

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Trustee Knowledge & Understanding (TKU) Course