DB to DC pension transfers: communications caught between a rock and a hard place?

Helen Powell

Here’s the dilemma: as a sponsor or trustee of a DB pension scheme, you’re aware that something else is going on underneath all the noise of the Budget around allowing people to access their DC savings. There’s an ongoing consultation about what the impact will be for DB members – will they be allowed to transfer freely to a DC environment and access their pension savings?

Widespread DB to DC transfers would run counter to recent efforts to protect members from being incentivised to transfer their benefits out of DB schemes, and the Government is clearly nervous about the impact on financial markets more widely if private sector DB to DC transfers are allowed to happen. It has suggested a range of possible half-way houses, from transferring only with trustee consent, or subject to an annual cap, to transferred benefits remaining ring-fenced and subject to current tax rules. None of these look at all desirable (at least from a trustee perspective).

So, it’s entirely possible that we’ll end up with a ban on DB to DC transfers in both the public and private sectors. The thing is, we don’t yet know for sure, and we won’t know until (probably) the autumn. But if a ban is announced in response to the current consultation, then it’s likely to have immediate effect (that is, before next April, potentially overnight once the response is published) in order to prevent a gold rush of DB members transferring out in the relatively short window available.

The question employers and trustees are increasingly asking us is this: should we be saying anything to DB members? And if so, what?

Tackling those issues in turn, is there a duty to make this information available to members? There have, for example, been cases suggesting that there is either an implied contractual term or a duty of care requiring employers to make employees aware of the existence of valuable rights which are contingent on the individual taking action within a certain period, and which he or she could not otherwise be expected to be aware of. But does this fall into that category? There are strong arguments for saying no:

*  There is no certainty about what the Government will decide – there is no duty to tell employees or members about what is, for the moment, industry speculation.

*  The information is already in the public domain – it may not have received as much publicity as other elements of the Budget, but an individual who is interested in transferring to DC could easily find it out. You could draw a parallel with cases brought by members who failed to register for primary and/or enhanced protection by 5 April 2009, following the A-Day tax changes. One member who tried to claim protection late was told by the First-Tier Tax Tribunal that there had been sufficient publicity about the deadline by the Government and HMRC, and in newspapers generally, to make him aware of the need for action.

*  Deferred members are perhaps the group most likely to be interested in transferring, and even where there is a duty it is in any case less likely to apply to them than to active members.

However, it is sometimes said (for example by the Pensions Ombudsman) that there is a higher duty to inform members about their rights and options where there is ongoing interaction on a relevant issue (for example, a member aged 54+ who is in discussions with the employer/pensions team about retirement options). Or you may have made some kind of commitment to members to keep them informed, or believe that they expect you to do so. If you’re in that situation, what should you say?

Completely neutral, factual information has to be the best option, together with a statement that members should take advice on their own specific circumstances. The ‘rock and a hard place’ issue is, of course, the risk of being seen as encouraging or even inducing hasty transfers which may in the end turn out to have been unnecessary and/or not in members’ financial interests. There’s probably more risk associated with appearing to encourage a transfer than with failing to inform members about a possible ban. However, some members – for example, those with substantial AVCs in a DB scheme – need to tread particularly carefully, and will need expert advice, since there’s currently no certainty about the extent to which AVC benefits will be affected by any restrictions on DB to DC transfers.

Helen Powell is a PSL Counsel at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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