To what extent should trustees of DB schemes "police" member's requests to transfer their DB benefits to overseas pension schemes?
Back in April 2015, the government relaxed restrictions on the benefits that defined contribution pension schemes can pay. The media famously summed-up these changes with the message that a newly-retired pensioner could blow their pension fund on a Lamborghini.
At the same time, the government introduced safeguards which relate to members with defined benefit pensions. The concern was that members with a guaranteed level of income in retirement (i.e. a defined benefit pension) would transfer to a defined contribution pension scheme, in order to take advantage of the relaxations, and lose their pension guarantee in the process.
The key safeguard is that a member is required to obtain appropriate independent financial advice before they can use their right to transfer their pension fund out of a defined benefit pension scheme. The FCA rules set out what appropriate independent financial advice actually means. For example, an IFA should address the benefits and options and expected likely investment returns in the receiving scheme. In essence, the FCA rules require an IFA to compare the transferring scheme with the receiving scheme.
This creates a challenge for IFAs on a transfer out of a UK defined benefit pension scheme to an overseas pension scheme overseas known as a QROPS for short (this is an overseas pension scheme which satisfies various requirements imposed by HMRC in the UK). The crux of the challenge is the need for a UK-based IFA to give advice which deals with a pension scheme outside of the UK. The FCA itself indicated (in a policy paper from June last year) that it sees a challenge in this area.
We understand that IFAs do not always rise to the challenge. This, it seems, flows from a reluctance to provide financial advice which covers a specific pension scheme outside of the UK.
In turn, this leads to a further challenge for trustees of defined benefit pension schemes. The further challenge arises as trustees are required to check if a member has obtained appropriate independent financial advice. Trustees are then left wondering whether the advice a member has obtained is actually appropriate independent financial advice, which could only be the case if the IFA has risen to his or her particular challenge and met the FCA rules.
If trustees have reason to believe that a member has not actually obtained appropriate independent financial advice, they can simply refuse to make a transfer. But, of course, trustees will want to try and do what is best for the member.
The practical issue here for trustees is really that the law effectively requires them to carry out a policing role, in an FCA environment with which they tend to be unfamiliar. Inevitably, this ends up with trustees relying on their advisers.