New measures to speed up pension transfers on way as UK government confirms exit charge cap

Out-Law News | 11 Feb 2016 | 10:50 am | 2 min. read

Pension scheme members are to benefit from better guidance and faster transfers if they decide that they want to access their savings more flexibly than the scheme rules allow, the UK government has announced.

It will also extend the planned cap on pension scheme exit charges to trust-based schemes, as well as Financial Conduct Authority (FCA)-regulated contract based schemes, according to its response to last year's consultation on pension transfers. Trust-based schemes will also be subject to new requirements to report regularly on their pension transfer processing speed and accuracy, it said.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement "yet again" showed the government's determination to make sure that people were able to take advantage of the 2015 pension reforms.

"The cap will probably be a good thing for consumers - and it is certainly being billed as such by the policymakers," he said. "It does also mean that there is something of a trend now towards price controls in pensions, even for existing contracts; which creates further interesting parallels between pensions and public utilities. As with all the price controls, different pension providers will be hit differently - or not at all - by these developments."

"In addition to the price controls, there will be a range of additional measures to facilitate transfers. Guidance, reporting, greater use of technology and a new role for Pension Wise are on the cards. So too is a whitelist of 'trusted' receiving schemes of a certain quality – which puts pressure (probably intentionally) on master trusts to secure the master trust assurance framework if they want to play in the transfer space," he said.

As previously announced, the government intends to place a new duty on the FCA to cap early exit charges through the Bank of England and Financial Services Bill, which is currently before parliament. The level of the cap will be consulted on and set by the FCA, with input from the government and Pensions Regulator. The same requirements will then be extended to trust-based schemes, with are regulated by the Pensions Regulator.

New guidance on pension transfers will be issued to trustees by the Pensions Regulator as part of its defined contribution (DC) code of practice, according to the announcement. Among other things, this guidance will cover how transfers can be processed promptly and accurately without exposing savers to a greater risk of pension scams. Pension Wise, the government-backed service which provides free guidance to individuals accessing their pension savings, will also develop new transfer-related content which will include information on likely timescales, what customers need to do and more clarity around the circumstances in which formal financial advice is needed.

Around 670,000 consumers aged 55 or over were subject to an early exit charge before they could transfer out of their pension scheme, according to FCA research conducted as part of the consultation exercise. Of these, the majority were charged 0-2% of the value of their pension pot, but 81,000 individuals faced charges of 5-10% and 66,000 were charged over 10% of the value of their pension pot, according to the figures.

The consultation also found that transfers out of contract-based pension schemes took an average of 16 days, while transfers out of trust-based pension schemes took an average of 39 days. Many respondents to a consumer survey run alongside the consultation exercise told the government that they had to wait significantly longer for individual transfers, it said.

Since the law changed in April 2015, over £3.5 billion has been accessed flexibly from almost 400,000 pension pots, according to government figures. The new rules gave members of DC pension schemes more freedom over access to their pension savings after turning 55, without incurring heavy tax penalties or necessarily having to purchase an annuity.

The government also sought views about whether the requirement to seek independent financial advice before transferring 'safeguarded' benefits of over £30,000 out of a defined benefit (DB) pension scheme was acting as a barrier to accessing pensions as part of its consultation. However, it will now consider the advice requirement as part of its response with the FCA to the Financial Advice Market Review (FAMR), which is due to be published around the 2016 Budget, according to the consultation response.