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Transfer values: amending regulations and consultation response published
Practical Law UK Legal Update 7-381-3177 (Approx. 5 pages)
Transfer values: amending regulations and consultation response published
by PLC Pensions
| Published on 16 Apr 2008 • England, Scotland, Wales |
The regulations amending the transfer value legislation have been laid before Parliament and are due to come into effect on 1 October 2008. At the same time, the Department for Work and Pensions (DWP) has published its formal response to the consultation initiated in July 2007. Detailed amendments have been made to the draft amending regulations published for consultation, although there are no real policy changes. The new regime will provide for cash-equivalent transfer values (CETVs) to be calculated on a scheme-specific basis. Trustees will have sole responsibility for setting the assumptions used in the calculation of CETVs, and must set these on a "best estimate" basis.
Background
In July 2007, the Department for Work and Pensions (DWP) issued a consultation document and draft regulations which would change the regime for calculating cash equivalent transfer values (CETVs) from defined benefit schemes. The changes were designed to implement a scheme-specific basis for calculating CETVs, in preference to other methods canvassed in an earlier consultation. Scheme trustees would have sole responsibility for setting the assumptions used in the calculation of CETVs, and should decide these on a "best estimate" basis, after obtaining actuarial advice (see Legal update, DWP consults on draft transfer value regulations).
In October 2007, the DWP announced that it had decided to delay implementation of the reforms from April until October 2008, following concerns that the pensions industry would not have sufficient time to prepare for the changes (see Legal update, DWP to delay new transfer value regulations until 1 October 2008).
Summary
The DWP has published a formal response to its 2007 consultation on the CETV reforms. Simultaneously, the regulations amending the existing CETV regulations have been laid before Parliament in their final form.
The DWP comments on several key points arising from the consultation:
- Pensions Regulator guidance. The Regulator will issue guidance on various points surrounding transfers. This may also cover non-statutory transfers and incoming transfers, neither of which the amending regulations cover owing to the absence of suitable enabling powers in primary legislation.
- Actuarial advice. Existing actuarial guidance note GN11 will cease to be in force after the revised regime comes into effect. The Board for Actuarial Standards is not expected to issue a standard to replace GN11. At the moment, non-statutory transfers in excess of CETVs are covered under GN11 and the DWP is considering whether the Regulator's guidance should cover this area too.
- Disclosing assumptions. Some respondents suggested that the assumptions underpinning the CETV calculations should be available to members on request. The DWP has rejected this proposal for the time being, but notes that the disclosure regime is currently being reviewed under the government's deregulatory review (see Practice note, Deregulatory review: state of play).
- Employer role. Some respondents expressed concerns about the absence of a role for the employer in determining transfer values above the statutory CETV minimum level. But the DWP notes that trustees have a fiduciary duty to all parties involved in their scheme, including the employer, and that trustee boards usually include employer representatives.
- Transitional provisions. Given the delay in implementing the new regime, the DWP has not included extensive transitional provisions in the amending regulations. Instead, the DWP suggests that schemes address issues of concern through their work planning. For example, they suggest that the current approach should be used for requests for statements of entitlement received in August or September 2008, provided the trustees are confident they can issue the statement before 1 October. Otherwise, they encourage schemes to select a guarantee date after 1 October.
Main provisions in the Amending Regulations
On 1 October 2008, the Occupational Pension Schemes (Transfer Values) (amendment) Regulations 2008 (SI 2008/1050) (the Amending Regulations) will come into force. They amend the Occupational Pension Schemes (Transfer Value) Regulations 1996 (SI 1996/1847) (the Transfer Value Regulations).
Regulation 4 will insert new regulations 7 to 7E in the Transfer Value Regulations. These will set out the key requirements in the new regime:
- Regulation 7: trustees' responsibilities. Scheme trustees will be responsible for calculating and verifying CETVs. The CETV will be a minimum level of a transfer quotation, and trustees can pay higher amounts in certain circumstances (see regulation 7E below). The employer will have no role in calculating CETVs or setting the assumptions used in the calculations.
- Regulation 7A: basic features. This regulation provides an overview of the way CETVs must be calculated. The first stage is calculating an initial CETV. The key principle governing this calculation is that it must be the amount at the guarantee date required to make provision within the scheme for the member's accrued benefits, options and discretionary benefits.Two provisions in the consultation draft have been removed: first, the requirement for a CETV to be calculated by reference to a member's normal pension date has been removed, on the basis that the expression "accrued benefits" includes a right to be paid benefits from a particular date. Second, the obligation for the trustees to obtain the actuary's advice on the member's accrued benefits, the options available to the member that might increase his CETV, and any discretionary benefits (including those paid under custom and practice) has been deleted. Instead, the trustees must determine these issues themselves.
- Regulation 7B: actuarial assumptions. The trustees must use the economic, financial and demographic assumptions determined under this regulation to calculated initial CETVs. They must set the assumptions on a "best estimate" basis, after obtaining the actuary's advice. When choosing demographic assumptions, the trustees must consider the make-up of their scheme.The provision in the consultation draft requiring the discount rates used by the trustees to reflect the member's status has been deleted, on the grounds that respondents pointed out that most schemes do not have explicit investment strategies for particular classes of member. Instead, a new provision requires the trustees to have regard for the scheme's investment strategy when setting discount rates. So, for example, if a scheme made a long-term asset switch from equities to bonds, this should affect the discount rate assumption used in calculating CETVs.
- Regulation 7C: money purchase benefits. For schemes with defined contribution (DC) benefits, the initial CETV is defined as the realisable value of any benefits to which the member is entitled (and this conceptual approach applies to cash transfer sums, which are dealt with in Schedule 2). The resulting value must include interest payments to which the member is entitled under the scheme rules.The provision in the consultation draft which provided that, where schemes had assets invested in with-profits arrangements, the trustees had to set the necessary assumptions on a "best estimate" basis has been deleted. In this situation, the DWP advises that calculations must be made under regulations 7A and 7B.
- Regulation 7D: reducing CETVs. This regulation introduces Schedules 1A and 1B. Schedule 1A allows the trustees to reduce a CETV if "insufficiency conditions" are met. These are that the actuary's insufficiency report (the successor to a report under GN11) shows that the scheme's assets were insufficient to cover its liabilities as a whole, and for each category of member. The trustees can reduce a CETV by the percentage by which the assets are insufficient to cover the liabilities. Paragraph 15 of Schedule 1A inserts the provision from GN11 that allows trustees to deduct "reasonable" administration expenses, but they must offset against these costs any reasonable administrative savings.Schedule 1B sets out the requirements for insufficiency reports. In relation to timing, the provision in the consultation draft that the trustees could commission an insufficiency report at the same time as they commission a formal valuation under the PA 2004 has been deleted following concerns that trustees would be forced to obtain insufficiency reports even when they did not intend to reduce CETVs. Instead, paragraph 2(b) of Schedule 1A provides that for the trustees to rely on an insufficiency report, it must have an effective date no earlier than the effective date of the most recent valuation under the PA 2004.
- Regulation 7E: increasing CETVs. New regulation 7E allows trustees to pay higher CETVs than the initial CETV, but they can only do so if they have obtained any necessary consents to pay the higher amounts (usually the employer's).
Regulation 3 in the Amending Regulations will amend the Transfer Value Regulations to widen the circumstances in which trustees can extend the period for calculating CETVs from three to six months.
The Amending Regulations make several consequential amendments to other legislation. Paragraph 8 of Schedule 2 amends the Occupational Pension Schemes (Early Leavers: Cash Transfer Sums and Contribution Refunds) Regulations 2006 (SI 2006/33). Provisions are inserted in regulations 2 to 2C and 4 that are equivalent to the provisions in regulations 7 to 7E described above.
Comment
Significant changes have been made to the Amending Regulations following the consultation. For the most part, these are drafting improvements and there is little of substance that has changed from the consultation draft. Two areas may cause the most concerns: first, the removal of non-statutory transfers from the regulations. Concerns expressed by respondents to the consultation included whether a full statutory discharge might not be received for a transferring scheme if it paid a higher CETV than it was required to under the Amending Regulations. Presumably, the promised guidance from the Regulator will deal with this point (among others), but by itself non-statutory guidance is not going to be sufficient. Another set of regulations may be needed.
The second area of concern is the absence of any detailed transitional provisions. The DWP's suggestion that trustees should try and manage these issues through their "workflow" is unlikely to be adequate. In reality, lots of situations are likely to arise where there are uncertainties about which approach to apply. Since many schemes are still in the dark about the effect of the new approach on the amount of an individual member's CETV, it is almost inevitable that there will be a rise in member complaints in this area.