Summary and implications

The changes announced in the Budget in March 2014 give individuals with money purchase or cash balance pension savings (referred to in this briefing as "flexible benefits") more flexibility as to how and when they access their funds. Although much of the focus has been on schemes providing flexible benefits, there are also important issues for DB employers and trustees to consider.

In this briefing we discuss some of the major points employers and trustees of DB schemes should be looking at. The majority of the changes will come into effect on 6 April 2015 and schemes must be ready.

New transfer requirements

Additional safeguards are being put in place to the statutory cash equivalent transfer regime, meaning that a member wishing to transfer a DB benefit "with a view to acquiring flexible benefits" must first take independent financial advice. There is more detail on this in our recent briefing.

Employers and trustees should be considering together whether they want to allow anything in excess of the statutory minimum. The most obvious option would be to allow DB benefits to be transferred up to the point of crystallisation rather than restrict it to at least a year before normal pension age (NPA). Another option would be to allow partial transfers, giving members the opportunity to retain some DB benefit but transfer the remainder out to a DC arrangement.

Trustees need to:

  • put in place systems for obtaining the necessary independent advice confirmations;
  • review and revise communications with members (including scheme booklets and transfer documentation) to reflect the new provisions;
  • adopt sufficiently robust discharges for any transfers which are outside the statutory minimum requirements; and
  • ensure they have sufficient liquid assets in anticipation of an increase in the number of transfer requests.

Schemes holding money purchase AVCs or other flexible benefits

From 6 April 2015, schemes will be able to allow members to draw their money purchase AVCs (or any other flexible benefit) from age 55, totally independently of the DB benefits. There is no obligation to offer this, but it may be helpful to the scheme to encourage it, particularly in relation to smaller pots. In addition, members will have a statutory right to transfer out all their flexible benefits up to the date of crystallisation, leaving behind the DB benefit. The non-statutory options which could be made available to members with money purchase AVCs as a matter of benefit design include:

  • taking the entire amount as a lump sum (subject to the payment of tax);
  • drawing tranches as lump sums (this may be attractive for members but less so for trustees having to administer it); and
  • drawing-down an income (this not something most schemes are likely to offer).

Trivial commutation

The Budget changes give more scope for removing small benefit pots through trivial commutation. Benefits can now be commuted from age 55 where the individual has aggregate pension savings (across all registered schemes) of no more than £30,000. Benefits valued up to £10,000 can be commuted regardless of other pension savings. Trustees should check their scheme rules to confirm the circumstances in which benefits can be commuted for triviality. Some will require member consent, others could be at the instigation of the trustees or employer.

Employers may wish to consider a communication exercise to encourage members with small benefit pots to take them as lump sums. In some circumstances, this might bring into play the voluntary code of practice on incentive exercises, in which case members will have to be provided with advice or guidance.

Converting DB benefits

The new flexibilities present an opportunity for employers to allow members to convert some or all of their DB benefits into flexible benefits within the scheme (as an alternative to a transfer). Any conversion would have to be with member consent and the trustees would have to be satisfied that each member had also taken independent financial advice. Conversion is not currently possible in contracted-out schemes.

New disclosure requirements

There are a number of key new disclosure requirements for trustees. The first is the requirement to signpost members to "Pension Wise" (the new name for the guidance guarantee). This applies where a member has a right or entitlement to flexible benefits (so will include money purchase AVCs in an otherwise DB scheme). Very broadly, trustees must inform the member of their right to obtain guidance in order to assist them in making decisions about their flexible benefits. The guidance itself will be delivered by the Pensions Advisory Service or Citizen's Advice Bureau. Details of exactly what information must be provided and when will be included in amendments to the disclosure regulations.

Once a member has taken a flexible benefit (whether as a lump sum or drawdown), new annual allowance provisions will apply, with the member having a future annual allowance of £10,000 for further flexible benefits savings and £30,000 for other tax relieved pensions savings. Trustees will be obliged to notify a member within 31 days of him first accessing flexible benefits, confirming the new annual allowance and informing the member of his own obligations to report the information to the administrator of any other pension schemes of which he is an active member.

Risk management exercises generally

The new flexibilities present employers with an opportunity to consider whether any risk management exercises would be appropriate. This might be by way of an enhanced transfer exercise, benefit conversion or a combination of the two. The new possibilities which flexible benefits offer to members may make take-up more likely than in the past.

Employers should ensure that, where appropriate, they comply with the voluntary code on incentive exercises. This may require the employer to pay for independent financial advice (or in some cases, guidance) on the offer.

Investments & assumptions

From 6 April 2015, DB schemes may find that more members are taking transfer payments before retirement rather than drawing a scheme pension. This means that the valuation assumptions and the structure of the scheme investments may need to be reviewed. For schemes with triennial valuations due in the near future then this could be done in the normal course of events. Trustees of schemes with a recent valuation may want to consider commissioning further actuarial advice once they have a feel for the likely increase in transfer requests.

An increase in demand for transfer payments could also prompt trustees to review the level of CETVs being paid. They should consider taking actuarial advice on whether the scheme's funding position requires CETVs to be scaled down. The employer should be involved in any discussions on scaling down CETVs as this may impact on any risk management exercise it might be considering.

Trustees should also be considering the investment offering in relation to any money purchase benefits within the scheme. Lifestyle type funds, where the assets are moved into gilts or bonds in the period before retirement, may no longer be appropriate for members intending taking lump sum benefits.

Death benefits

The tax legislation will in practice allow a beneficiary to receive any remaining flexible benefits on the death of a member either as a lump some or as drawdown income. This will be tax free as long as sufficient lifetime allowance remains and the member dies before age 75. Tax will be payable where the member dies aged 75 or over. In practice, it would seem sensible for schemes to provide for the death benefits to be paid as a lump sum in most cases. Members wishing to use their benefits for inheritance tax planning reasons may want to transfer to a personal pension arrangement offering flexible drawdown.

Action list

Below are action lists for employers and trustees, picking up on the issues considered above.

Action points for employers
Decide what, if any, new transfer options in excess of the statutory requirements are to be made available. Be clear on what the rules currently allow.
Decide whether members will be allowed to convert DB to flexible benefits within the scheme (contracted-in schemes only).
Where the scheme has flexible benefits (including AVCs), decide what benefit options will be offered.
Consider whether any changes in practice on trivial commutation are desired.
Consider whether the changes offer an appropriate opportunity to instigate a risk management exercise (offering enhanced transfers, conversions, commutations or other modifications).
Discuss and communicate any proposed changes with the trustees. Where there will be a cost impact on the scheme then the decision should primarily lie with the employer but early engagement with the trustees is desirable (and in some schemes may be required in order to effect scheme amendments).


Action points for trustees
Decide what, if any, new transfer options in excess of the statutory requirements are to be made available. Be clear on what the rules currently allow.
Review the transfer process and documentation to ensure it complies with the new statutory requirements and any new scheme provisions.
Review and revise scheme booklets (and all other communication material) to bring it up to date with any changes.
Where the scheme holds flexible benefits, ensure that communication processes correctly signpost Pension wise.
Discuss with the Scheme Actuary whether an actuarial review should be considered.
Review the calculation of cash equivalents (in the light of the transfer experience from 6 April 2015).
Consider a review of the Statement of Investment principles and (where flexible benefits) whether the default fund remains appropriate.
Retain open communication channels with the employer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.