The Handbook definition of pension transfers includes defined contribution occupational schemes as well. The comments here relate specifically to defined benefit occupational schemes.

Involved in Defined Benefit (DB) pension transfer business?

In our November 2007 Financial Adviser newsletter, we highlighted the complexity of conducting DB pension transfer business on a direct offer basis. We have recently become aware of a number of firms that are either involved in conducting transfers, or considering transfers in this way.

We wish to stress to firms our belief that it is very difficult to make a direct offer financial promotion for a DB pension transfer that is fair, clear and not misleading and meets the FSA's other rules (including COBS 4.5.2). Such a decision is likely to be too complex for a consumer without specialist knowledge to make and it will be very difficult for a financial promotion to fully explain the risks. The FSA reminds firms that in reviewing such financial promotions, the FSA will start from the presumption that such transfers are not suitable. The FSA will enhance its supervisory scrutiny of these activities and enforcement action will be considered where appropriate.

The following contains the most frequently asked questions about transfers from occupational pension schemes in wind-up.

My customer’s defined benefit occupational pension scheme is being wound up and the trustees intend to buy out her benefits through a deferred annuity contract. My customer would like to transfer her benefits to a stakeholder pension instead. As, whatever happens, she will not be able to remain in the occupational scheme, is this classed as a transfer or should I simply compare the benefits of the deferred annuity with a stakeholder pension?

Until the occupational pension scheme is actually wound up, any transfer out of it must be treated as a pension transfer. So, in this situation you must follow the rules specified in the Conduct of Business sourcebook and you must be or have your recommendations checked by, a pension transfer specialist.

If your customer had approached you after her benefits had been transferred to the deferred annuity contract, the situation could still be the same. If a deferred annuity contract contains fixed or guaranteed benefits, a transfer to a stakeholder pension would still be a pension transfer.

I am assisting a customer whose previous employer is insolvent and is winding up its defined benefit occupational pension scheme. The scheme is under-funded and my customer wants to know if she should transfer her deferred pension. When I carry out a transfer value analysis, should I compare the benefits and drawbacks of transfer with the full benefits of the scheme or with an estimate of the actual benefits my customer is likely to receive?

Winding up an occupational pension scheme can be a long and complicated process, particularly where the employer is insolvent. The scheme may not be able to provide your customer with the full benefits promised; however, it is difficult to determine what benefits it might actually provide her with. What you must try to do is compare benefits on a like for like basis. For example, if the scheme trustees expect to provide your customer with 80% of her full benefits then you should compare a transfer with 80% of her full scheme benefit. If you want to use an estimate of the benefits a scheme will provide, you should request one from the scheme trustees. Only estimates of benefits provided by the scheme trustees should be used; you should not attempt to estimate benefits yourself.

I have been asked to assist a board of trustees to wind up a defined benefit occupational pension scheme. The trustees are offering members the choice of securing their benefits through a section-32 policy (the default option) or taking a transfer value. Should the employer allow members to transfer their benefits into its designated stakeholder pension?

The employer has no say in whether employees can transfer their benefits to a stakeholder pension, as it is a direct contract between an individual and a provider. In any case, stakeholder pension providers cannot refuse to accept transfer values. Trustees should encourage members to take advice as pension transfers are complicated and it is difficult to make suitable decisions without advice, even when all the relevant information is provided.

My firm has received numerous enquiries from customers concerned about their defined benefit occupational pension schemes and interested in transferring their benefits. What, if any, qualifications do I need to advise them and how do I obtain the correct authorisations?

Pension transfers are a very complicated area. In order to give advice on a pension transfer you must either be a pension transfer specialist or have your advice checked by one. A pension transfer specialist needs to have been assessed as competent by the firm for that role and must have approval in CF 30. The firm must also have specific permission to conduct pension transfers.

The pension transfer specialist must check any pension transfer recommendations you make. The pension transfer specialist must also hold one of the examinations listed by the Financial Services Skills Council under TC Appendix 1R activity number 11 as appropriate for acting as a pension transfer specialist.

These are:

• Fellow or Associate of the Faculty of Actuaries;
• Fellow or Associate of the Institute of Actuaries;
• Fellow or Associate (by examination) of the Pensions Management Institute;
• Fellow or Associate of the Chartered Insurance Institute (including three pensions-related subjects as confirmed by the examining body);
• G60 paper of Advanced Financial Planning Certificate, the Chartered Insurance Institute
• Unit AF3 of the Advanced Diploma in Financial Planning, the Chartered Insurance Institute; or

Pensions paper of Professional Investment Certificate, the ifs School of Finance.
It is the responsibility of firms’ senior management to decide which approved examination is appropriate for their employees. A pension transfer specialist must be assessed as competent for this role.

An adviser at my firm recently advised a customer about moving her benefits away from a defined benefit occupational pension scheme in wind-up. I now realise that this was a pension transfer and that the adviser in question was not authorised to give this advice. What should I do?

Firstly, you must report this breach to your usual FSA supervisory contact. They will help you to decide what remedial action you need to take. Secondly, you should review your Training and Competence (T&C) scheme, to prevent similar breaches in future. It is the responsibility of senior management to ensure that their employees are appropriately qualified and competent to carry out their roles. If this is an isolated incident it might be an honest mistake but you should check that it is not a symptom of wider failings in your T&C scheme.

A longstanding customer of mine has recently contacted me, as his defined benefit occupational pension scheme is being wound up. Inspired by a newspaper article, he has decided, without my input, to transfer his benefits to a self-invested personal pension and wants some guidance as to which one might suit him. If I help him with only the selection of a new provider, will I need to classify this as a pension transfer?

When you give advice you must consider the whole transaction – you cannot advise on the selection of a new provider in isolation. Although your customer has not sought your advice on the merits or otherwise of his decision, this transaction will still be a pension transfer. You can only advise your customer if you do so according to a pension transfer specialist’s procedures and if a pension transfer specialist checks your recommendations before you present them to your customer. Otherwise, you should refer him to another adviser. As noted previously, pension transfers are a complicated area and you should strongly recommend that your customer speak to an adviser specialising in this area to ensure that he understands all the issues involved. Transfers from occupational pension schemes to self invested personal pensions are specifically referred to in the pension transfer definition.

Further Information

November 2007 Financial Adviser newsletter