The commentary around these proposals was hugely positive and suddenly pensions had become front page news.
Earlier this week, HM Treasury released its response to the 12 week consultation which had taken place with a wide range of stakeholders, including pension providers, employers, consumer groups, investment banks, think tanks, public sector bodies, law firms, actuarial firms and individuals.
These participants were invited to respond to a series of questions covering the key issues of the reform proposals and help to shape the policy going forward. As expected, the Treasury have said that the response was “overwhelmingly positive” however that view may not be shared by some non-UK resident members of defined benefit schemes.
DB to DC transfers
For the majority of people living and working in the UK, it has been a long held belief that retained membership of an existing defined benefit scheme is likely to remain their best option. The government recognises in the consultation response however, “that this will depend on individual circumstances and that for some people having a more flexible approach to retirement may be preferable”.
Over the last few years there has been a growing trend among those who will permanently retire and remain outside of the UK to seek advice on transferring their UK defined benefit pension to a more flexible DC arrangement however, the proposals and subsequent consultation response may actually prohibit that advice from taking place.
The UK government had initially proposed that transfers from all public sector defined benefit schemes should be prohibited citing that allowing this to continue after the increased demand that new pension freedoms “could represent a significant cost to the taxpayer, as these schemes are largely unfunded” however they have since watered down those proposals saying that transfers from funded public sector defined benefit schemes would continue to be permitted.
This would mean that members of the Local Government Pension Scheme (LGPS), which is the largest of the funded public service pension schemes would still be able to exercise their right to transfer however it is bad news for NHS, teachers, fire-fighters, police and armed forces whose schemes are unfunded and therefore will have their right to transfer removed from 6 April 2015.
HM Treasury also confirmed that “the existing flexibility of transfers out of private sector defined benefit schemes for all pension scheme members (other than those whose pensions are already in payment)” would also be retained however, as with funded public service pension schemes there would have to be additional safeguards.
Additional safeguards
As any adviser worth his salt knows, transferring defined benefits to a defined contribution pension scheme is possibly one of the most complex areas of advice that an adviser will ever get involved with. It is imperative that the member understands the associated risks as well as the perceived benefits and so any additional safeguards that can help protect members are usually very welcome.
This week’s announcement however, that “the [UK] government intends to make it a statutory requirement on the transferring scheme for all individuals who are considering transferring out of defined benefit schemes to take advice, from a professional financial adviser who is independent from the defined benefit scheme and authorised by the FCA, before transferring”, will have some unintended consequences and could even lead to non-UK resident members of defined benefit schemes finding themselves in an advice ‘no man’s land’.
The issue is that the Financial Conduct Authority only regulates advice provided to residents of the UK, or at best inside the EU (if appropriate passporting of permissions has been sought). That means that members of defined benefit schemes who are currently resident outside of the EU will have no one to turn to for help with this important decision.
For example, in much the same way that an adviser regulated in Singapore is not authorised to advise a UK resident; an FCA regulated adviser in the UK is not permitted to advise clients who are resident in Singapore unless they have obtained regulatory permissions in that jurisdiction.
All is not lost
The government has reiterated its commitment to allowing transfers from unfunded public service pension schemes “in very limited circumstances” but has yet to announce what those will be. It is also still unclear what the implications that the changes to the pension tax rules will have on Qualifying Recognised Overseas Pension Schemes (QROPS).
As it stands, the new freedoms do not extend to QROPS and significant legislative work will be required before this can be considered which makes it disappointing that so few QROPS providers decided to participate in the consultation.
The hope is however, that these further consultations can be used as a catalyst to highlight all of the issues as they affect UK expats and those non-UK domiciled members of defined benefits schemes. Brooklands Pensions will continue to work with the UK government on this and will lobby for a concession for those who can demonstrate that they will permanently retire and remain offshore and will ask that those individuals are also exempt from the safeguard regarding FCA regulated advice where it is inappropriate.
So all is not lost but at the moment non-UK resident members of defined benefit pension schemes may quite rightly feel a little less positive today about the reforms than perhaps the UK government had intended.
