The DWP is planning to introduce new measures to empower trustees and pension providers to protect their members from pension scams. Draft regulations (which are subject to consultation) would see four new statutory conditions introduced, one of which must be met before a statutory transfer could take place. Although many will argue that such measures are long overdue, the new regime will put the onus on trustees and pension providers to ensure a condition is met before they allow a transfer to take place. In some instances this will be relatively straightforward to determine. However, in others difficult judgment calls may need to be made, exposing schemes and providers to a potentially greater risk of member complaints and claims.
Based on reports to Action Fraud, over £30 million was lost to pension scams between 2017 and August 2020. However, this is likely to be a substantial underestimate. The Pension Scams Industry Group, a voluntary body set up to tackle pension scams, estimates that £10 billion has been lost by 40,000 people to pension scams since 2015.
Given the scale of the problem, which is likely getting worse as scammers adopt increasingly sophisticated tactics and look to take advantage of the uncertainty created by Covid-19, the DWP has responded by proposing new measures designed to empower trustees and pension providers to prevent transfers to potential scam arrangements. The proposals aim to strike a balance between providing greater protection for pension savers, giving trustees and scheme managers a greater level of power to act and continuing to give savers the right to exercise choice over how they use their pension savings.
Under the DWP’s proposals (summarised in the flowchart below), a statutory transfer will only be able to proceed if one of the following four conditions is met:
First Condition – Transfer to Low Risk Scheme
The first step in the new regulatory regime (referred to as the “First Condition”) will require trustees and scheme managers to identify if a transfer is to one of the following types of scheme:
- a Public Service Pension Scheme established by The Public Service Pensions Act 2013
- an authorised master trust
- an authorised collective money purchase scheme (when the appropriate regulations come into force), or
- a pension scheme operated by an insurer registered and authorised by the FCA and authorised by the PRA, or within the same corporate group as such an insurer.
If it is, the transfer may proceed. However, in order for this condition to be satisfied the trustees or scheme managers must confirm that the receiving scheme has been authorised or established in accordance with the relevant requirements for the particular type of scheme.
Second Condition – Employment link
The “Second Condition” will apply to a transfer to a receiving scheme that is an occupational pension scheme to which the First Condition does not apply. To satisfy the Second Condition a member must demonstrate an employment link by establishing to the satisfaction of the trustees or managers of the transferring scheme that:
- the member’s employer is a sponsoring employer of the receiving scheme
- the member is in employment with the sponsoring employer and this employment has lasted for a continuous period of at least 3 months ending with the date the request to make the transfer was received by the trustees or managers of the transferring scheme
- the member’s employment during the last 3 months of that period has met the prescribed minimum salary requirement (i.e. the member must have been paid a weekly salary, during the last 3 months, which was at, or above, the lower earnings limit), and
- the member and the sponsoring employer have both contributed to the scheme during those last 3 months.
The Second Condition will be satisfied where the trustees or managers of the transferring scheme decide on the balance of probabilities that the evidence provided by the member (which will be prescribed in the regulations) demonstrates the employment link.
Third Condition – Transfer to a QROPS
A member will have a statutory right to transfer to a QROPS that is an occupational pension scheme if the member can demonstrate an employment link (as per the Second Condition) or, if the employment link is not satisfied, where they can demonstrate a residency link (the “Third Condition”).
Transfers to a QROPS that is not occupational pension scheme will also be able to take place where a residency link is established.
The residency link must be demonstrated by evidence from the member that they have been resident in the same financial jurisdiction as the QROPS for a continuous period of at least six months ending with the date the request to make the transfer was received by the trustees or managers of the transferring scheme. Once again, it will be for the trustees or managers of the transferring scheme to decide on the balance of probabilities that the evidence provided by the member demonstrates the residency link.
The DWP does not intend to prescribe precisely what form the evidence of residency should take on the basis that this will differ from country to country. However, they have indicated that the Regulator will issue guidance on this.
Where a member is asked by the trustees or scheme manager to provide specified evidence to demonstrate an employment or residency link and fails to do so, there will be no statutory right to transfer.
Fourth condition – Red and amber flags
For all other types of transfers (i.e. those to which the First, Second and Third Conditions do not apply), the regulations will require trustees and scheme managers to determine if circumstances giving rise to any of the prescribed ‘red flags’ or ‘amber flags’ exist.
Where none of the red or amber flags are present the “Fourth Condition” will be satisfied and the transfer will be able to proceed.
A transfer will also be able to proceed where one or more amber flags are present but only where the member has taken expert scams guidance from the Money and Pensions Service (MaPS), or where they have made a transfer to the same receiving scheme in the last 12 months and provide evidence of having taken MaPS scams guidance in that period.
If a red flag is present the transfer should not proceed and the member will not have a statutory right to transfer in these circumstances.
Based on the draft regulations a ‘red flag’ will be present where the trustees or scheme managers have a reasonable belief that:
- financial advice has been provided by firms or individuals without the appropriate regulatory permissions, or such firms or individuals have been involved in recommending that the member make the transfer (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 (such as a free pension review, early access to some or all of their pension savings before normal pension age, a savings advance or cashback from their pension savings), and/or
- the member was pressured to complete the transfer quickly, within a short or time limited period.
The following will also be red flags which will prevent a transfer from taking place:
- a member failing or refusing to respond to a request for information from the trustees or managers of the transferring scheme in connection with establishing whether the Fourth Condition is met, and
- a member failing to provide specified evidence that they have taken scams guidance, where they are required to do so.
An amber flag will be present where the trustees or scheme managers have a reasonable belief that:
- there are high risk or unregulated investments included in the receiving scheme
- the fees being charged by the receiving scheme are unclear or high
- the proposed investment structures are complicated or unorthodox
- the receiving scheme includes overseas investments or any of the advisers are based overseas, and/or
- there has been a high volume of transfers to a single receiving scheme or involving a single adviser or firm, or both.
The consultation closes on 10 June 2021 and it is likely that these new transfer conditions will apply from the Autumn.
Trustees, pension providers and scheme administrators will inevitably need to review and update their transfer processes and checks when the proposals are finalised. We have summarised the steps schemes will need to take to (based on the current proposals) in the flowchart below (click on the image to expand).
Something undoubtedly needs to be done to reduce the incidences of pension scams. These latest proposals are the most far-reaching attempt to date by any Government to try and stem the flow of pension savings into scam arrangements.
While this may be good news for would-be victims, the new measures will place an even greater onus on trustees, pension providers and scheme administrators to ensure that appropriate checks are carried out before a transfer is allowed to take place. It may also expose them to increased risk of being held liable if a transfer is allowed to take place to what turns out to be a scam arrangement, particularly as trustees and providers will be forced to make a judgment in many instances about whether the necessary employment or residency link exists or whether a red or amber flag is present. In light of this risk, trustees and providers might choose to adopt a cautious view of any evidence they receive. However, this will not be a risk free option either as they will also face the prospect of complaints from disgruntled members where transfers are not allowed to proceed.
If you have any queries about any of these developments speak to your usual HSF adviser or contact a member of our pension disputes team.