20 May 2021
- DWP consults on restricting the right to transfer
- DWP legislates for simpler annual benefit statements
- PPF to receive Government loan for fraud compensation payments
- Pensions dashboard team reports on progress and looks to the future
- Dormant Assets Bill introduced to Parliament
- Regulators ask how to make pensions consumer journey work for savers
The DWP has published a significant consultation on restricting the statutory right to transfer occupational and personal pension scheme benefits, designed to frustrate those who wish to scam members of their pension rights.
The Pension Schemes Act 2021 prevents trustees of occupational pension schemes and managers of personal pension schemes from processing a transfer to another occupational pension scheme, a personal pension scheme or an overseas scheme unless certain conditions are met. The proposed regulations require at least one of four conditions to be met – as follows:
The first condition
The receiving scheme is any of a public sector scheme, an authorised master trust, an authorised collective money purchase scheme, or a pension scheme operated by an insurer that is registered and authorised by the Financial Conduct Authority and is authorised by the Prudential Regulation Authority. This is effectively a narrow ‘white list’ of schemes for which there are no scam concerns.
The second condition
The receiving scheme is an occupational pension scheme not meeting the first condition, to which the member can demonstrate an “employment link” as set out below.
The member must be able to demonstrate that their employer sponsors the scheme, they have been employed by that employer for the previous three months, with a salary over this period of at least the equivalent of the Lower Earnings Limit, and contributions have been made to the scheme by (or on behalf of) the member and the employer during those three months.
This condition has been designed to thwart transfers to bogus occupational pension schemes, such as that in the 2016 Hughes vs Royal London case (see Pensions Bulletin 2016/07).
The third condition
The receiving scheme is a Qualifying Recognised Overseas Pension Scheme (QROPS) but does not meet the second condition. The member must demonstrate that they have been resident for at least six months in the same financial jurisdiction as that in which the QROPS is established.
Fears that this would bring to an end the QROPS transfer market have turned out to be unfounded as a member not meeting the third can always turn to the second or the fourth condition.
The fourth condition
This applies where none of the three conditions above apply. For such a transfer to proceed, no “red flags” must be present, and if any “amber flags” are present the member must have taken pension transfer scams guidance from the Money & Pensions Service.
The red flags are as follows:
- The member has failed or refused to respond to a request from the trustees for information in relation to the fourth condition
- An amber flag has been raised, the trustees have required the member to take the MaPS guidance, but the member has not provided evidence that this has been done
- A person or firm without appropriate regulatory permission has provided financial advice to the member in relation to the transfer, or such a person or firm has recommended that the member make the transfer without formally providing financial advice (except where the receiving scheme includes overseas investments and an overseas adviser has advised the member in relation to those investments)
- The member’s request to make the transfer was made further to unsolicited contact about making a transfer from a party previously unknown to the member
- The member has been offered an incentive to make the transfer
- The member has been pressured to make the transfer quickly
The amber flags are as follows:
- There are high risk or unregulated investments included in the receiving scheme
- There are unclear or high fees being charged by the receiving scheme
- The investment structures of the receiving scheme are unclear, complex or unorthodox
- The receiving scheme includes overseas investments or an overseas adviser has advised the member in relation to such investments
- The trustees of the transferring scheme are aware of a high volume of requests to make a transfer from their scheme either to a single receiving scheme, or involving a single adviser or firm of advisers, or both
Where the trustees or managers are required to make a judgment as to whether a red or amber flag exists, this needs to be done on the basis of having a “reasonable belief” that the flag exists based on the evidence available to them – it is permissible but not necessary to seek flag information from the member. To assist trustees and managers, a set of standard questions has been prepared which will sit outside the regulations.
The regulations also set a new disclosure requirement – that the trustees or managers must provide the member with information about these conditions, and the requirement for at least one condition to be satisfied before a transfer can proceed, within one month of either the date that the member requests a statement of the cash equivalent value of their transferrable rights or the date the member requests to make a transfer, whichever happens first.
Consultation closes on 9 June 2021 and responses are invited from anyone with an interest in pension transfers, in particular trustees and scheme managers. The DWP intends to lay the regulations before Parliament in the autumn, but it is not clear from when they will come into force. There is also the promise of guidance from the Pensions Regulator for occupational schemes and equivalent support from the FCA in relation to personal pension schemes.
This is a comprehensive set of proposals which should go some way to preventing pension transfers from taking place to vehicles and/or “investment opportunities” controlled by scammers, where despite the best efforts of the transferring scheme the member is insistent on transferring. As such we whole-heartedly welcome this important step up in member protection and hope that there will be significant engagement with the consultation to ensure that the final regulations are as good as they can be.
Some bona fide providers, particularly those operating in the SIPP market, will be concerned that they are not on the “white list”. Trustees and managers will need to have some protective guidance in relation to how they should operate their red and amber flags. For example, under this new approach if they fail to raise a flag when they should have done, the member might be able to subsequently argue that the transfer was invalidly made.
The DWP has launched a consultation on regulations and associated statutory guidance that will require certain money purchase schemes to fulfil their annual obligation to provide benefit statements through simpler means. This follows on from the Government’s response to an earlier consultation in which it signalled that it would go ahead with such a proposal (see Pensions Bulletin 2020/43).
Under the proposals, disclosure regulations will require schemes providing money purchase benefits only that are qualifying for auto-enrolment purposes to issue a benefit statement that does not exceed one double-sided sheet of A4. The information on this statement is exactly the same as that required under the current disclosure regulations, with the ability for more to be added – space permitting. Those in receipt of benefits are excluded.
The purpose of the draft statutory guidance is to assist schemes and providers to meet this new duty. The guidance references a five-section template, a draft of which has also been published showing how it is possible to keep to the two pages restriction. It is not compulsory to use this template, but it is expected that many schemes and providers will choose to do so. The guidance also refers to “layering” additional information intended to complement the shorter statement. In essence this simply means that trustees can include additional information in supplementary documents sent at the same time as the statement. The guidance does not alter the approach to projection which remains governed by the basis issued by the Financial Reporting Council.
Consultation closes on 29 June 2021 and the new requirement is intended to be operative from 6 April 2022, with a proviso that where a benefit statement has already been issued under the current regulations before 6 April 2022, the new requirement does not apply immediately. Nevertheless, administrators and system providers will need to start planning now to make the required changes to their documentation and processes.
The new provisions, including the guidance, will also be subject to review at intervals not exceeding three years with the first review to report before 6 April 2025.
The DWP has also established a Working Group to investigate the concept of a “statement season” in which schemes would be required to send their statements during a certain point in the year, and whether this could improve public conversations about retirement saving. The group’s first meeting took place on 17 May.
These proposals bring to a conclusion the work initiated as part of the 2017 auto-enrolment review. We look forward to a new era of simpler and much shorter DC benefit statements, providing a quick check for members on what they currently have, what they may have in future and what actions they could take to improve the future. However, care should be taken to ensure that “layering” additional information with the statement does not just result in members being bombarded with too much information or compliance material.
A Bill has been introduced to Parliament that will enable the DWP to make loans to the PPF in order that it can meet claims on the Fraud Compensation Fund arising from the High Court case of PPF v Dalriada Trustees last November (see Pensions Bulletin 2020/47).
As a completely separate matter the Bill also establishes a compensation scheme for bondholders of London Capital & Finance plc as a result of failures by the Financial Conduct Authority in its regulation of the now insolvent company. The Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill had its first reading on 12 May 2021.
The High Court’s findings had immediate effect from 6 November 2020, with the PPF estimating that compensation payments will be in the region of £350m. The Fraud Compensation Fund had just £26.2m in it at the time of the judgment, and in April this year the PPF announced that the 2021/22 levy was, for most schemes, to be triple that charged in 2020/21 – at the maximum 75p per member permitted (see Pensions Bulletin 2021/15). However, even allowing for future levy income a shortfall in the region of £200m - £250m is expected. The intention is that this will be plugged, over a 10-15 year period, by a further increase to the levy on eligible occupational pension schemes, consultation on which is scheduled for Autumn 2021.
So it seems that the good schemes will pay for the member losses incurred by the criminal, with the only question being over how long they will be required to pay. It is also not clear whether the levy to pay for the sins of the past will remain a simple so many pence per member, or another basis of assessment will be used.
In its third and latest report on progress, the Pensions Dashboards Programme (PDP) reveals that a call for input will be issued in spring 2021, setting out proposals for the staging order and timing for the compulsory connection of pension providers to the dashboard ecosystem. A specification document will also be published, providing more information about the ecosystem's functionality, in preparation for those connecting to the dashboard.
Other updates in this 32-page progress update report include the following:
- Publication of an updated programme timeline, which remains in six phases but with more detail added
- Anticipation of having suppliers in place by September 2021 for the central digital architecture and by early 2022 for the identity service
- Confirmation that the infrastructure to provide state pension information will be in place ahead of the first publicly available dashboard
- DWP intends to consult on regulations in December 2021 on how the dashboard infrastructure will operate and how organisations will need to make individuals’ data available to them
- The FCA is to make rules so that compulsion on data provision applies to the providers of personal and stakeholder pension schemes. It will also develop an authorisation regime for organisations seeking to become dashboard providers, and make rules governing the conduct of authorised dashboard providers – no timelines are given for any of these
- The Pensions Regulator will regulate the compliance of occupational pension schemes, which in turn will rely on administrators, administration software providers, and integrated service providers to support them – again, no timelines
Chris Curry, the PDP’s Principal, states that the last six months since the previous report has been full of activity and the programme remains on track against the indicative timeline published last October (see Pensions Bulletin 2020/44). According to the timetable, voluntary onboarding will start in Spring 2022 and staged compulsory onboarding will start in April 2023. However, there remains insufficient information to be able to specify when sufficient pensions will be findable in order for the PDP to make the dashboard live.
This latest report reveals what a complex project this is proving to be. Whilst it is good to hear that the project remains on track, given that the first phase of mandatory data requests will only happen in the first half of 2023, it now seems that the dashboard will not be live until well into 2024. As such it seems that we are at least three years away from having a first working dashboard that can be used by consumers to find their pensions, and even further away from one that is fully functioning.
The Dormant Assets Bill, as announced in the Queen’s Speech earlier this month (see Pensions Bulletin 2021/20), had its first reading in the House of Lords on 12 May and its second falls due on 26 May. The Bill expands the Dormant Assets Scheme established by the Dormant Bank and Building Society Accounts Act 2008, which as its name suggests, was limited to bank and building society accounts.
In relation to pension assets, eligibility under the expanded Scheme is limited to personal pension scheme benefits that have become payable in the form of income withdrawal, or have become payable or could immediately become payable from a scheme under which all the benefits that may be provided are money purchase and which is not and has never been a qualifying scheme or an automatic enrolment scheme. These eligible pension benefits are treated as being dormant if any of the following four conditions are met:
- The pension provider has been notified that the member has died and is satisfied that there is no-one entitled to receive benefits
- At least 7 years have passed since the pension provider was notified of the member’s death and in this time it has not heard from anyone administering the member’s estate or from anyone entitled to receive benefits
- The pension provider is satisfied that the member would be at least 120 years old and, during the last 7 years, has not heard from anyone administering the member’s estate or from anyone entitled to receive benefits
- Where benefits have become payable in the form of income withdrawal following the contract term ending, at least 7 years have elapsed from this point and the pension provider has not heard from the member
The Bill also provides for certain long-term insurance assets to be eligible and this is likely to include proceeds of annuities with a guaranteed payment term and deferred annuities. The dormancy conditions for these proceeds are broadly the same as those outlined above.
The Bill contains a power to extend the Scheme in future to cover new dormant assets.
Some factsheets about the Bill have also been published. Amongst other things they confirm that the first priority is to reunite customers with their assets, customers are always able to reclaim what they would have been owed had their assets never been transferred into the Scheme, and the Scheme remains voluntary for businesses, both as to whether they choose to join and how much they transfer.
This is all broadly as expected, with sight for the first time of the dormancy conditions for pension assets. On the face of it these seem to be sufficiently protective for the member and anyone else who could benefit, so long as the pension provider has made every effort to see whether there is someone to whom benefits can be paid.
Whilst the provisions for pension and insurance assets are relatively narrow, the ability to extend the scheme offers the prospect of other pension assets being brought into scope in future – such as the occupational sector, particularly authorised master trusts.
As promised last week (see Pensions Bulletin 2021/20), the FCA and Pensions Regulator have published a joint call for input inviting views on how consumer behaviour at key points in the pension saving journey could improve pension outcomes.
The call for input concentrates on the first two stages of the pensions journey: starting up a pension and accumulating. The paper sets out what the regulators consider to be the current practices and perceived barriers to a successful build-up of pension saving; and questions the effectiveness in regulating firms and trustees in a world where pension savers’ decision-making has a key role in outcomes, whilst suggesting some actions that the regulators might take to facilitate improvements.
The deadline for feedback is 30 June 2021. Both bodies intend to use the responses received to consider and target future regulatory interventions in areas that benefit consumers the most.
It is not surprising that the regulators, while concentrating to fulfil their statutory duties to regulate pension schemes and providers, might lose sight of the overall consumer outcome, especially with the many changes introduced in the last few years. This call for input is a step in the right direction, and if scheme trustees, providers and industry groups share their views to the open questions posed in this consultation, this collective effort might just help create the magic wand needed to improve pension savers’ understanding and engagement to their retirement income.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.