New pension transfer rules
You may remember that back in March this year I wrote a BeeLine on the stir caused when the Occupational Pensions Regulatory Authority (OPRA) issued guidance for pension scheme trustees on pension transfers. If you remember, they needed to issue guidance because some amendments to the way pension transfers are calculated were in the pipeline and trustees didn’t know what they should be doing in the interim. Well, the relevant bits of legislation (The ‘Occupational Pension Schemes (Transfer Values and Miscellaneous Amendments) Regulations 2003’, no less), have just popped out the other end of the legislation pipe and came into force a few days ago. Now, I don’t want to go into all the detail of the why’s and the wherefore’s on all this again. Anyone who wants to know the history can look it up by following the link to the 11 March BeeLine at the end of the document. What I want to do is to briefly let you know where we are now that these regulations are finally with us.
The whole point of these amendments is to enable transfer values to be finely adjusted to take account of the exact valuation position a pension scheme is in when an individual decides to transfer his or her pension rights away from the scheme. This has always been the thinking behind transfers, by the way, at least since the 1995 Pensions Act came into force, but the way in which it worked in practice has resulted in some inequities. The regular funding check, introduced by that Act, that company pension schemes undergo is referred to as the MFR, which is shorthand for the Minimum Funding Requirement. The problem, in a nutshell, is that MFR valuations can quickly go out of date in a fast-moving environment. So these new regulations now allow trustees and actuaries to fine-tune transfer payments to take account of the actual position a scheme is in at the time of a transfer, rather than of where it was at the last MFR review.
Because everybody knew this new basis was coming in this Summer, but back in February some trustees needed to know what action they could take then, OPRA took the unprecedented step of allowing some trustees to decline to offer transfer values for a while if they felt other scheme members would suffer if they did not do so. This caused a bit of a fuss at the time, so it is worth reporting here that now these amendments have come into force OPRA has announced that the guidance it gave in February has now been superseded, or in my parlance, bitten the dust.
Good, well that’s that little episode over then, but where are we now? Well these new rules say that transfer values can not only be adjusted to take account of the MFR position the scheme was in at its last valuation, but can now also be adjusted to take account of the scheme’s ability to dish out full transfer values to all members if necessary. Now, that all sounds well and good, fine and dandy even, but how do trustees go about doing this sort of thing? The answer is, “this is where GN11 comes in”. Hmmm! GN11 is code for Guidance Note number eleven. Guidance Notes are what actuaries use to ensure they all work to consistent guidelines. It’s a note from actuaries to actuaries really.
What happens if a transfer request comes in and the trustees aren’t sure what to do, is that they can instruct their scheme actuary to sort of run an eye over the scheme GN11-wise and see whether it is in good shape. If it's not, then the transfer value offered to the member can be reduced to allow for the general level of underfunding, and that means other people remaining in the scheme won’t be losing out because someone else has toddled off. However, for the person doing the toddling, this means taking a transfer value at that particular time may not be the best financial decision they’ve ever taken. So it raises a lot of issues around advice and timing.
By the way, the Faculty and Institute of Actuaries has just upgraded GN11 to coincide with all this. The previous version, GN11 version 8.1, which has been around since April 2001, is now upstaged by Version 9.0. It’s not just computer software companies that go in for upgrades you know. It’s everywhere these days.
OPRA, to finish off, are now saying that all those companies that were affected by its previous guidance back in February should now be discussing the need for a GN11 report from the scheme actuary “as a matter of urgency”. Another thing I’m noticing more and more about pensions issues these days. Everything’s urgent.....
8 August 2003
The information provided is based on Scottish Life’s current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.