Pensions: New regulations and guidance for DC bulk transfers

On 6 April 2018, new regulations came into force making changes to the rules that apply to DC bulk transfers. A new guidance note for trustees and employers was also published.

What is a DC bulk transfer?

A DC bulk transfer is made when the trustees and/or employers of a pension scheme transfer the DC benefits of members to another pension scheme, without the consent of those members. This type of transfer might be made if, for example, an employer has several DC arrangements and wants to consolidate them, or if a smaller DC scheme wants to migrate to a larger one with a view to improving governance and accessing better value for money.

Why have the rules relating to DC bulk transfers been changed?

Before April 2018, trustees and employers could make a DC bulk transfer if: the trust deed and rules contained a power to do so; and both of the following conditions were met:

• there was a sufficient connection between the employers of the schemes making and receiving the transfer; and
• an actuary had certified that the rights the members would get in the receiving scheme would be 'broadly, no less favourable' than the rights that were being transferred.

These conditions were designed for, and worked well for, bulk transfers of DB benefits. However, they were less relevant to (and more difficult to apply to) bulk transfers of DC benefits. To address this, the government consulted on ways of simplifying the process for DC bulk transfers. Following this consultation, the government published the new regulations and guidance note.

What has changed?

The 'old' conditions for making a DC bulk transfer, including the need to obtain an actuarial certificate, no longer apply. Instead, trustees and employers can make a DC bulk transfer if: the trust deed and rules contain a power to do so; and any one of the following conditions is met:

• the transfer is made, on or after 1 October 2018, to a 'master trust' that is authorised by the Pensions Regulator;
• the employers meet a new 'group undertaking' condition; or
• in the 12 months before the transfer, the trustees (or employer, if the trust deed and rules give the employer the power to make the transfer) have received and considered written advice on the transfer from an 'appropriate adviser' who is 'independent' of the receiving scheme.

The regulations and the guidance note explain the new 'group undertaking' and 'appropriate adviser' conditions in more detail. The guidance note also covers choosing an adviser, the points that advice on a DC bulk transfer should address, factors that can be taken into account in assessing a receiving scheme, the content of member communications, data quality and data protection, the content of the formal 'transfer agreement' between the schemes, the charge cap (see below), and tax protections.

Does this mean there is no longer any need to take advice?

These changes mean that there is no formal requirement for the trustees or employer to take advice if the transfer will be to a master trust authorised by the Pensions Regulator, or the new 'group undertaking' condition is going to be met. However, the guidance note confirms that trustees still need to act in accordance with their trust law duties and so may find it helpful to take advice. In practice, the questions raised by bulk transfers mean that trustees and employers will still need advice in most cases.

What about the charge cap?

The new regulations contain provisions designed to make sure that:

• members who are protected by the charge cap (which will be relevant to any DC scheme or section which has been used to meet automatic enrolment duties) do not lose that protection as a result of the transfer; and
• the starting position is that members who self-selected funds more than 5 years before the bulk transfer (and so are less likely to have been automatically enrolled and to have made a conscious decision not to invest in a default option protected by the charge cap) are brought under the protection of the charge cap.

Osborne Clarke comment

Trustees and employers who are considering, or are in the process of completing, a DC bulk transfer should discuss the new regulations and guidance with their legal adviser. If the transfer will complete before 1 October 2019, it will still be possible to use the old 'actuarial certificate' route, but any transfer completing on or after 1 October 2019 will have to be made under the new rules.

Although the formal requirement to take advice from an 'appropriate' adviser who is 'independent' from the receiving scheme only applies in certain circumstances, the reality is that advice will still be needed in most cases. The new guidance note is also likely to be relevant to any DC bulk transfer, whether made under the 'old rules', under the 'new rules' in circumstances where advice is not mandatory, or under the 'new rules' in circumstances when advice is mandatory.