New transfer rules for combatting pension scams

New rules in relation to statutory transfers rules came into force on 30 November 2021 to protect members’ pension savings from being lost as the result of a transfer to a scam arrangement.

Trustees and managers (trustees) must take additional steps before a statutory transfer can be paid.

Regulatory guidance

The new requirements (and everything in this article) only apply to statutory transfers. The Pensions Regulator (TPR) has published new guidance which makes it clear TPR trustees are to carry out the same level of due diligence for non-statutory transfers too. 

The guidance also sets out TPR’s expectations in terms of the information trustees should gather and the checks they should carry out in relation to the conditions explained in this article and encourages trustees to take a risk-based approach.   

New Regulations

The Occupational and Personal Pension Schemes (Conditions for Transfer) Regulations 2021 (the Regulations) contain two transfer conditions which must be satisfied in order for a transfer to be paid:

1. first condition: applicable where the receiving scheme is a prescribed scheme.
2. second condition: applicable to all other schemes.

It’s worth noting that the Regulations look quite different to the draft regulations published back in May. For a recap on those, you can read our article or listen to our podcast on the draft regulations.

The first condition 

Prescribed schemes to which the first condition applies are public service schemes, authorised master trusts and authorised collective money purchase schemes (once the last of these are up and running). 

Where the first condition applies, trustees must satisfy themselves “beyond reasonable doubt” that the receiving scheme is one of the prescribed schemes. This is a high standard of proof which is perhaps better expressed in reverse — if trustees have any reasonable concern that the receiving scheme is not a prescribed scheme, then the condition cannot be satisfied.

Given the statutory framework within which they exist, identifying a prescribed scheme for the purposes of the first condition should not be difficult or require further evidence. That being the case, and in keeping with the importance of data protection, trustees can only ask members for further information if it is to help them identify the correct receiving scheme.

The second condition 

In all other cases, the second condition applies a red and amber flag system. Amber flags include the receiving scheme having high or unclear charges or unregulated investments. The presence of an amber flag requires trustees to suspend the transfer and direct the member to the Money and Pensions Service (MaPS) for guidance. The second condition will then only be capable of being satisfied once the member has provided evidence of that guidance having subsequently been taken.  

Red flags include the member having received either an incentive to transfer or unregulated advice, or the member refusing to provide evidence that they have taken MaPS guidance when directed to do so by trustees. The presence of a red flag means the second condition cannot be satisfied and prevents trustees from making the transfer. 

The second condition contains more flexibility than the first condition to fast-track low risk transfers. When trustees receive a member’s transfer paperwork they may be able to decide the second condition is satisfied without asking for further information. 

In order to do so, trustees must be satisfied on the balance of probabilities that there are no red or amber flags present. TPR’s guidance recognises that this approach might be appropriate for low risk transfers. The practical reality is trustees will need to be fairly confident in their conclusions before allowing anything but the lowest risk transfers through on this basis. 

Where trustees are not satisfied that no flags are present, they must request further evidence from the member. Trustees will then need to assess whether the material provided by the member satisfies the second condition. The degree of satisfaction they must have varies between “beyond reasonable doubt” and the lower standard of “reason to believe” depending on the flag in consideration. 

If trustees suspect that the evidence was not provided by the member directly or may not be genuine, or if the evidence is incomplete, an amber flag is present and the member must be directed to MaPS. Failure by the member to provide the completed evidence requested is a red flag and prevents trustees from paying the transfer.

Occupational Schemes and Qualifying Recognised Overseas Pension Scheme (QROPS)

Transfers to occupational pension schemes and QROPS are covered by the second condition but are treated slightly differently to other types of receiving schemes. In addition to the general red and amber flag checks, in all cases trustees must ask for evidence of an employment or residency link. Until this evidence is provided in standard transfer paperwork, transfers to these schemes cannot be fast-tracked.  

The Regulations set out what trustees can accept as evidence of the relevant link. If the evidence does not demonstrate the relevant link, the transfer does not automatically fail. Although the absence of a link presents a scam risk, there may be situations in which it is absent for genuine reasons and so an amber flag will present and the member must be directed to MaPS for guidance. If the member subsequently fails to provide the evidence that they have taken that guidance, a red flag appears.

Evidence from members directly 

Where trustees request further evidence, that evidence must come from the member directly to help minimise the opportunities available to ill-intentioned third parties who might seek to interfere with the information presented to trustees of transferring schemes. This requirement applies even where a member has appointed a representative, subject to a limited number of circumstances relating to powers of attorney and mental capacity.

What do these changes mean?

Pension scams have been a troublesome area for trustees. They have often been faced with the difficult task of weighing the risk of a pension scam against a member’s statutory right to transfer and until now the legislation has done little to help them. The position has been equally frustrating for members who may feel trustees do too much or too little, depending on whether their transfer suffered a delay or resulted in the loss of their retirement savings.

The Regulations sit alongside existing, separate obligations of trustees to check whether members seeking to transfer defined benefit pensions in excess of £30,000 have sought appropriate independent advice. Together, these measures give protection to a broader range of members and offer trustees a wider scope to require them seek independent guidance or ultimately prevent a transfer. They also give trustees a legal basis for acting and help assure members that they are acting diligently and in accordance with legal requirements in order to protect their pension savings.  

On the face of things, the position looks much improved. The government however recognises that its work is not done when it comes to combatting pension scams. It will review the Regulations after 18 months to ensure that they remain effective in achieving this aim.