1035 exchange in qualified plan?

[Belgarath]

I've got a rather unusual question for some of you attorneys out there. We have a client who has a life insurance policy in his pension plan. (and I don't want a debate about life insurance in qualified plans, please!) The client wants to purchase a new life insurance policy, within the plan, with another company. But they don't want to surrender and transfer the money to the new policy, because doing so would cause the new policy to be in MEC status. (And they know that MEC status doesn't make any difference while in plan, but they plan to purchase it from the plan in a couple of years.)

What they are doing, on advice of counsel, is to do a 1035 exchange from company A to company B.

Now, I'm not aware of anything in Section 1035 which says it CANNOT be used in a qualified plan. But I'm rather concerned that the act of assigning the policy to company B, even though part of an integrated 1035 transaction, might be considered a prohibited transaction as an impermissible assignment? Am I worrying about nothing? Any thoughts on this whole issue? Thanks.