News Alert 2021/04

At a glance

Regulations have been laid before Parliament that will have a major and almost immediate impact on the operation of the individual pension transfer market.  These regulations, intended to protect departing members from pension scams, will require trustees and other pension providers to urgently review their transfer processes and policies.

Key Actions

Trustees

• Liaise with administrators to ensure that the new requirements are embedded in transfer processes
• Agree appropriate levels of delegation to administrators
• Seek legal advice as necessary

HR and pension manager teams

• Ensure all pension arrangements (including DC schemes, insurance company and Master Trust providers) revisit their transfer processes (including at the point of retirement where relevant)
• Be prepared for delays in processes, and a potential for increased member complaints in the short term

The Detail

Background

Despite various industry and regulatory initiatives there have been high levels of fraud relating to individual pension transfers over many years.  One of the difficulties with the various initiatives to date is that pension legislation can give scheme members a legal right to take a transfer value even if the transferring scheme has reason to believe that the receiving scheme is a fraudulent one.  The Government has now moved to address this problem.

New legislation

The Pension Schemes Act 2021 provides that the trustees of an occupational pension scheme (or the managers of a personal pension scheme) may not transfer a member’s “cash equivalent” to another pension scheme except where prescribed conditions are satisfied.

The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (SI 2021/1237) (the Regulations) which were laid before Parliament on 8 November 2021 prescribe these conditions.  The Regulations come into force on 30 November 2021.

The Regulations apply where a member of either an occupational pension scheme or a personal pension scheme has requested a statement of the cash equivalent of their transferrable rights (in the case of salary-related benefits), or in any other case where the member has requested to make a transfer, where such requests fall on or after 30 November 2021.

The Regulations provide that a cash equivalent may not be paid to a receiving scheme unless either the First or the Second Condition is met.

This News Alert describes and comments on key aspects of these somewhat complex regulations.

The Pensions Regulator has also published guidance on the operation of the new transfer law.  For the most part, this guidance is a ‘plain English’ guide to the regulations, with little guidance as such.  Nevertheless, it is a valuable document as it explains, in clear terms, how this new regime operates.

The First Condition

The First Condition is that the receiving scheme is any of a public sector scheme, an authorised (and listed) master trust, or an authorised (and listed) collective money purchase scheme.

The Condition is met where the trustees / providers of the transferring scheme have satisfied themselves that the receiving scheme meets the above criteria.  The trustees / providers must not require evidence or information from the member, apart from details necessary to confirm the scheme’s identity.

Our viewpoint

The Government has set its face against producing an “external list” of safe haven schemes for the First Condition and as a result few schemes in the private sector will meet it.  Transfers to those that do not will need to meet the Second Condition and it is here where the trustees / providers will need to use their judgment in how they go about assessing whether this Second Condition is met.

The Second Condition

The Second Condition is that 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 and Pensions Service (MaPS) and provide evidence that they have done so to the trustees / provider.

In addition, if the receiving scheme is an occupational pension scheme, an “employment link” must be demonstrated.  And if the receiving scheme is a qualifying recognised overseas pension scheme (QROPS) a “residency link” must be demonstrated.

The Regulations contain detailed provisions about the evidence or information that trustees / providers must in some cases obtain and in others may choose to seek, to decide whether or not the Second Condition is met.

• Where the receiving scheme is an occupational pension scheme the trustees / providers must obtain the evidence to demonstrate the employment link (see below)
• Where the receiving scheme is a QROPS the trustees / providers must obtain the evidence to demonstrate the residency link (see below) or the employment link if the QROPS is an occupational pension scheme
• The trustees / providers may request from the member such evidence or information relating to the transfer they consider relevant to decide if any flags are present but are not required to. Trustees / providers can also use information they have obtained from other sources to reach a flag decision

Our viewpoint

The provision that trustees / providers can move straight to a decision without calling for flag evidence is a new one that has emerged since the Regulations were first consulted on in May.  The policy intention is that the flags merely build on the existing best practice due diligence which trustees / providers should be carrying out on transfers.  Accordingly, if trustees / providers are confident that a particular scheme doesn’t present a scam risk then (other than satisfying themselves about the employment / residency links where appropriate) they don’t need to tie themselves up in unnecessary procedure to process the transfer application.

This is a welcome simplification of the earlier proposals but if a transfer to a scam did go through under this quick procedure it could look bad if this came to light.  Trustees / providers will therefore need to take a view, seeking advice as appropriate, about what criteria to apply when deciding whether to ask for evidence.

The Second Condition – red flags

There are six red flags with the first two being where the trustees / providers have decided that:

• The member has failed to provide a substantive response to a request for prescribed evidence or information in respect of the Second Condition; or
• One or more amber flags have been raised, as a result of which the trustees / providers have required the member to take the MaPS guidance, but the member has not provided the required evidence that this has been done

The remaining red flags are set out below and are where the trustees / providers have decided that:

• A person without the “appropriate regulatory status” has carried on a “regulated activity” in respect of the transfer – eg a person not authorised by the Financial Conduct Authority to give advice about pension transfers has nevertheless done so
• The member’s request to make the transfer was made further to “unsolicited contact” for the purpose of “direct marketing” of the transfer
• The member has been offered an “incentive” to make the transfer – such as a free review to make the transfer (although where an incentive is offered by the trustees or sponsor of the transferring scheme, or someone they have authorised to do so, we believe this is not caught by the definition); or
• The member has been pressured, or considers that they have felt pressured, to make the transfer

Our viewpoint

Trustees / providers will need to formulate a policy on how best to decide if a red flag is present.  It will need to be proportionate, but also not be prone to miss red flags.  It seems quite clear that if trustees / providers pay out when there is a red flag, they may well be called upon to reinstate the member’s benefits if the member becomes a victim of fraud.

The Second Condition – amber flags

There are eight amber flags and are where the trustees / providers of the transferring scheme have decided that:

• The member has provided a substantive but incomplete response to a request for evidence or information
• Some or all of the evidence provided by the member may not be genuine or may not have been provided by the member themselves
• All of the evidence required to be provided by the member in relation to the employment link or residency test (or both where appropriate) has been provided, but the evidence does not demonstrate the required links
• 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 structure of investments included in the receiving scheme is unclear, complex or “unorthodox”
• There are overseas investments “included in” the receiving scheme (the extent to which this would capture investment in eg overseas equities within a UK domiciled fund is currently not clear to us); or
• There has been “a sharp or unusual rise” in the volume of requests to make a transfer from their scheme either to the same receiving scheme involved in the current request, or involving the same adviser or firm of advisers, or both

The Regulations sets out a number of factors trustees / providers should consider when considering the amber flags.

Our viewpoint

A number of the amber flags require trustees / providers to form judgments that they may well not feel qualified to make.  There will clearly be a temptation to err on the side of caution and refer transferring members to MaPS guidance sessions.

The Second Condition – employment link

Where the receiving scheme is an occupational pension scheme there is an employment link where the trustees / providers of the transferring scheme decide that:

• The member’s employer sponsors the scheme
• The member is employed and has been continuously so by that employer for the three months ending with the date the transfer request was received
• With an average gross weekly salary over this period of at least the equivalent of the Lower Earnings Limit
• Contributions have been made to the scheme by (or on behalf of) the member and the employer during those three months

The information – letters from the employer, payment/contribution schedules, payslips and bank statements – that may support an employment link are specified.

Our viewpoint

This employment link condition has been designed to thwart transfers involving bogus employment relationships, such as that in the 2016 Hughes vs Royal London case (see Pensions Bulletin 2016/07).  However, it will also pick up old-fashioned transfers-in to regular occupational pension schemes with the trustees / providers being forced to request the above evidence when they have no scam concerns.

The Second Condition – residency link

There is a residency link between the member and the receiving QROPS where the trustees / providers of the transferring scheme decide that the member is resident in the country or territory in which the QROPS is established.

Alternatively, where the QROPS is an occupational pension scheme, the employment link may be demonstrated.

Evidence for the residency link must be a copy or, where the trustees / providers request it, a certified copy, of the member’s formal residency documentation in the country or territory concerned and at least two other items of evidence in writing confirming the above test is met with, where those items are not in English and the trustees / providers request it, certified translations.

Our viewpoint

We anticipate that requests to transfer to QROPS will become even rarer than they are now due to the need to prove a residency link.

Final word

This is a comprehensive set of requirements 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 this is an important step up in member protection.

However, achieving the aims of member protection in a proportionate way will be a challenge for trustees and providers.  They will need to liaise with their administrators to ensure that the requirements of the legislation are embedded in their transfer processes and develop an approach to evaluating transfer applications for scam risk and the existence of flags in addition to their existing due diligence.

Unfortunately, very little lead time has been given to trustees, providers, or their advisers.