The Government has laid final regulations which will introduce new transfer conditions from 30 November 2021, one of which must be satisfied before a pension scheme can make a statutory transfer on behalf of a member. Trustees, providers and administrators must ensure they are ready by the end of this month to carry out the new checks that will be required. Failure to do so could expose them to potential liability should a transfer be allowed to take place to what turns out to be a scam arrangement.
Significant changes have been made to the final regulations following the Government’s consultation earlier this year. This has seen the number of transfer conditions cut from four to two. The changes also mean that a transfer cannot take place if a red flag is present, even if the member is able to establish an employment or residency link with the receiving scheme.
As expected, the onus will be on trustees and providers (and their administrators) to ensure one of the conditions is satisfied before a transfer is allowed to proceed. In some cases, difficult judgments may need to be made about whether, for example, a red or amber flag is present and schemes will need to have processes in place for the trustees or provider to determine whether the transfer can and should proceed in these situations. Clear and comprehensive records will also need to be maintained.
To ensure their scheme is ready to apply the new transfer conditions from 30 November 2021, trustees should:
- contact their scheme’s administrator immediately to find out what steps their administrator is taking to implement the new checks that will need to be carried out, and
- ensure processes are in place for the trustees to review higher risk transfers where the trustees will be required to decide whether the relevant transfer condition is met.
Providers and administrators need to:
- update their transfer processes to ensure the new checks are carried out
- put in place processes to identify higher risk transfers where judgments need to be made based on the available information, and
- review and update their ‘clean lists’ to ensure any schemes on them (which are deemed to be low risk and, therefore, warrant fewer checks) satisfy the new requirements.
Even though the new requirements technically only apply to statutory transfers, trustees and providers need to decide whether the same checks should also be carried out in relation to non-statutory transfers.
The Pensions Regulator has issued guidance to help schemes understand what they must do to correctly implement the new transfer conditions. It has also published a list of example questions to ask members which schemes can adapt scheme to obtain the necessary information following receipt of a transfer request. Schemes should also have regard to the Pension Scams Industry Group Code of Practice which is due to be updated to reflect these new requirements.
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, the Government has responded by introducing these new measures which are designed to empower trustees and pension providers to prevent transfers to potential scam arrangements. The measures aim to strike a balance between providing greater protection for pension savers, while continuing to give them the right to exercise choice over how they use their pension savings.
Under the final regulations, a statutory transfer will only be allowed to take place where one of the following two conditions is met.
The first condition will be met where a transfer is to:
- a public service pension scheme as defined in section 1(1) Pension Schemes Act 1993
- an authorised master trust which appears on the Regulator’s list of authorised schemes, or
- a collective money purchase scheme authorised by the Pensions Regulator.
Before any such transfer takes place, the trustees or managers of the transferring scheme need to satisfy themselves beyond reasonable doubt that the receiving scheme is established in accordance with the relevant legislation or listed as being authorised by the Pensions Regulator.
Condition 2 is now made up of several elements.
Employment or residency link
Where a transfer is to an occupational pension scheme not covered by Condition 1, the transferring scheme is required to request information from the member to demonstrate an ’employment link’.
Where a transfer is to a qualifying recognised overseas pension scheme (QROPS), the transferring scheme is required to request information from the member to demonstrate either:
- an employment link, or
- a ‘residency link’.
A transferring scheme will be required to request prescribed evidence from a member to establish whether an employment or a residency link exists. To mitigate the risk that this evidence could be falsified, a transferring scheme will be required to obtain this information directly from the member.
Where a member fails to provide evidence of an employment or a residency link within a prescribed period following a request from the transferring scheme (and a reminder), this will be a red flag and the transfer should not proceed. Where a response to a request for information is incomplete or where the trustees or managers of the transferring scheme have concerns that the evidence provided may not be genuine or may not have been provided directly by the member this will be an amber flag.
Any red or amber flags?
Where a transfer is being made to any type of pension scheme not covered by condition 1, including most occupational pension schemes, personal pension plans, group personal pension plans, self-invested personal pension plan and a QROPS, the transferring scheme is required to request sufficient information from the member to establish whether any red or amber flags are present in addition to any information that is needed to establish an employment or residency link where this is relevant.
The only exception to this, which applies in the case of a transfer to a scheme not covered by Condition 1 which is not an occupational pension scheme or a QROPS, is where the transferring scheme has sufficient evidence available to it already (for example, from processing previous transfer requests to the receiving scheme) to be satisfied that no red or amber flags exist in respect of that scheme. This is designed to allow trustees, providers and administrators to, in effect, fast track transfers to schemes which are not covered by Condition 1 but which are known to be ‘low risk’ or ‘safe’ schemes (for example, a transfer to a personal pension arrangement or group personal pension plan operated by a reputable insurer). However, the final regulations might throw a spanner in the works of this fast track process as, on the face of it, the amber flag relating to the presence of “overseas investments” in the receiving scheme will be present in relation to almost all transfer requests covered by Condition 2(see below for more details).
Where one or more red flags is present, a transfer should not take place (even if an employment or residency link exists) and the individual loses their right to take a statutory transfer in relation to that request.
Where one or more amber flags is present, the member is required to receive specialist scams guidance from the Money and Pensions Service (MaPS) before the transfer can take place (even if an employment or residency link exists). This guidance, which will be available from 30 November, is designed to alert an individual to the risks of pension scams and the warning signs to look out for. Once a member has attended a guidance session they will be able proceed with their transfer request. However, the transfer cannot take place until the member has supplied the transferring scheme with a unique identifier which will be provided by MaPS and which confirms they have attended a scams guidance session.
In addition, to the red flags that may arise where a member fails to provide evidence of an employment or residency link upon request, a red flag will also be present in respect of a transfer where the trustees or managers of the transferring scheme decide that:
- a person without the appropriate regulatory status has carried on a regulated activity for the member in respect of the transfer in breach of section 19 (the general prohibition) or section 20 (authorised persons acting without permission) of the Financial Services and Markets Act 2000
- the member’s request to make the transfer has been 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 pension review, early access to some or all of their pension savings before normal pension age, a savings advance or cashback),
- the member has been, or considers that they have felt, pressured to make the transfer, and/or
- a member fails to provide evidence that they have received specialist scams guidance, where they are required to do so.
Unhelpfully, the burden of proof differs depending on which red flag is being considered. Therefore, trustees and providers will need to consider carefully whether they have sufficient evidence when deciding whether a red flag is present.
In addition to the amber flag that may arise where trustees or managers have concerns about the veracity of evidence provided to establish an employment or a residency link (or whether such evidence has been provided by the member), an amber flag will also be present where the trustees or managers of the transferring scheme decide that:
- all of the evidence required to demonstrate the employment or residency link has been provided but it does not demonstrate that the relevant link exists (for example, in relation to the employment link, because an individual’s earnings are below the lower earnings limit)
- there are high risk or unregulated investments included in the receiving scheme
- the fees being charged by the receiving scheme are high or unclear
- the proposed investment structures in the receiving scheme are unclear, complex or unorthodox
- there are any overseas investments in the receiving scheme, and/or
- there has been a sharp or unusual rise in the volume of requests to make a transfer from the transferring scheme, either to the same receiving scheme or involving the same adviser or firm of advisers (or both).
Once again, the burden of proof differs depending on which amber flag is being considered. Therefore, trustees and providers will need to consider carefully whether they have sufficient evidence when deciding whether an amber flag is present.
On the face of it, transferring schemes may be required to undertake quite extensive due diligence to assess whether an amber flag is present. For example, in order to form a view on whether the fees being charged by the receiving scheme are high the transferring trustees or managers will need to take account of all charges related to the transfer, ongoing investment and administration charges within the receiving scheme, charges for early access, exit fees and any charges to be levied by third parties in connection with any of these matters.
Difficult judgment calls may also need to be made. For example, trustees or managers will be required to determine if fees are “at the high end of, or beyond, the normal range of fees in the current financial market” and if they are clear or not. They will also be required to judge whether the proposed investment structures are unclear, complex or unorthodox.
A further issue that has not been addressed in the final regulations despite being raised in response to the consultation, and which could cause significant practical difficulties, is that an amber flag will be present if there are any “overseas investments” in the receiving scheme. The scope of this term is not defined or limited in the regulations. On the face of it, this would capture common investments, such as investments in overseas equities or global equity funds, which almost all schemes are likely to hold. On this basis, members will be required to receive scams guidance in relation to almost all transfers not covered by the first condition. This cannot be the policy intention.
The Regulator has sought to address this issue in its guidance by saying that “the specific concern here is not whether the investment is in, for example, a global equity fund but whether the investment is in assets of funds where there is a lax, or non-existent, regulatory environment or in jurisdictions which allow opaque corporate structures.” While this is helpful, it is unfortunate that trustees, providers and administrators have been left to decide whether to apply the plain meaning of the regulations or to adopt a more purposive (and pragmatic) interpretation. This is especially so given no-one knows how the Courts or the Pensions Ombudsman will interpret this flag, particularly if they are asked to consider it in a scenario where a transfer is allowed to proceed to what turns out to be a scam arrangement and where the member was not required to receive scams guidance as no amber flags were identified.
Something undoubtedly needs to be done to reduce the incidences of pension scams. These new transfer conditions should help in this fight. However, the onus is very much on trustees, providers and administrators to be diligent in carrying out the necessary checks. Complex and higher risk transfers will need to be identified and difficult judgment calls will inevitably need to be made in some instances. Trustees and providers will need to determine how cautious or bullish they will be in borderline cases.
One of the trickiest things for schemes and administrators to get right will be to design processes that allow low risk transfers to be processed quickly and efficiently while ensuring that higher risk transfers are identified and properly scrutinised. This will require time and resource and, in some cases, it will inevitably lead to delays in transfers being paid. Unfortunately, neither the final regulations nor the Regulator’s guidance make clear whether an extension will be granted where a transfer cannot by paid within the relevant statutory deadline due to the length of time it takes to establish whether one of the Conditions is met. However, we hope the Regulator (and the Pensions Ombudsman) will adopt a pragmatic approach in such cases, particularly as schemes adapt to these new, more extensive due diligence requirements.
If you wish to discuss how the new transfer conditions may impact your scheme or organisation please speak to your usual Herbert Smith Freehills’ adviser or contact one of our specialists.