The new statutory transfer conditions, which are designed to help identify and prevent potential pension scams, come into force today. Trustees, pension providers and administrators have faced a race against time to implement the changes needed to comply with the final regulations which were only laid before Parliament on 8 November 2021. They are also having to grapple with some significant practical and legal challenges as they work out how they will apply the new conditions in practice.
Risk-based or Cautious approach?
One of the key questions administrators and schemes are having to answer is whether they will adopt a pragmatic, risk-based approach or a more cautious approach to the implementation of the new transfer regime. While the Pensions Regulator’s guidance suggests schemes can adopt the former this is not reflected in the regulations which, on their face, would lead to red and amber flags being identified in a large number of cases. In addition, while the Regulator’s guidance is helpful, if something goes wrong, it will ultimately be the Pensions Ombudsman or the Courts that will determine whether the relevant transferring scheme has done enough to identify and prevent a potential scam. At this point it is unclear how pragmatic or otherwise those adjudicators will be.
In reality, the approach adopted by schemes and administrators is likely to be more nuanced. Transfers to authorised master trusts and public sector schemes which fall within Condition 1 will proceed with minimum interference. All other transfers, which fall within Condition 2, are likely to be triaged into transfers to ‘safe’ schemes (i.e. schemes that appear on an administrator’s or provider’s ‘clean’ list) and higher risk transfers.
In relation to ‘clean list’ transfers, schemes and administrators may feel comfortable taking a more pragmatic, risk-based approach (for example, when identifying whether a red or amber flag is present) in order to avoid unnecessarily holding up legitimate transfers on the basis that there is a very low risk that any such transfer will end up in a scam arrangement. In contrast, for transfers to higher risk schemes, transferring schemes and administrators would be well advised to err on the side of caution if there is uncertainty over whether a red or amber flag is present given that, in most instances, it will be preferable to defend a complaint that a transfer has been prevented or delayed rather than having to defend a complaint that a transfer has been allowed to proceed to what turns out to be a scam arrangement.
Are you being serious?
As well as deciding on their overall approach and appetite for risk, schemes and administrators are also having to get into the weeds of the legislation and consider how they will apply and interpret the statutory red and amber flags. If they are taken at face value, several of the flags could arise in relation to almost all transfers. For example:
- How many receiving schemes will not have any overseas investments, such as overseas equities?
- How many members will provide all of the information requested from them?
- How many receiving schemes will have costs and charges that are clear?
A negative response to any of these questions would trigger an amber flag requiring a member to receive specialist scams guidance from MaPS before they can take a transfer.
Transferring schemes also need to decide how far they will go to establish whether or not a red or amber flag is present. For example, on the face of the legislation, where a transferring scheme is considering whether a receiving scheme has “high risk” or “unorthodox” investments it is required to consider not just how the transferring member’s funds will be invested immediately after the transfer but also how the funds of every other member of the receiving scheme are invested.
So does this really mean that trustees and providers (or more likely their in house or external administrators) are required to review every self-select fund in which members’ savings are invested under the receiving scheme to satisfy themselves that there are no proscribed investments? In practice, it is unrealistic to expect transferring schemes to carry out this level of due diligence in relation to every receiving scheme, but it is what the regulations say. Unfortunately, it has been left to trustees, providers and administrators to decide where to draw the line, exposing them to potential liability should things go wrong.
Transferring schemes also need to establish with their administrators who will decide whether a relevant condition is met or whether a red or amber flag exists. Under the regulations the buck stops with the trustees or managers of the transferring scheme. In practice, it is likely that administrators will be making this call in the vast majority of cases. Therefore, it is important that transferring schemes clearly set out what decisions are being delegated to their administrator and whether there are any circumstances, such as high risk transfers or borderline cases, where these decisions should be escalated to the trustees or managers for a final call.
With great power comes great responsibility
Although the new transfer conditions are now in force, it is likely to be some time before schemes and administrators reach a steady state in terms of how they will apply the new transfer conditions and police the red and amber warning flags in practice. Best practice will inevitably evolve over time and schemes and administrators will be keen to compare their emerging approach with the recommendations contained in the updated Pensions Scams Industry Group Code of Practice which is due to be published in the New Year.
There is no doubt that more needed to be done to try and reduce the scourge of pension scams. However, much onus has been placed on trustees, providers and administrators to determine how these new safeguards should be implemented in practice.
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.