Pension transfer regulations: empowering trustees and protecting members?

At present pension scheme trustees have little scope to refuse a member’s request to transfer their pension savings to another scheme, even where there are significant concerns that the receiving scheme might be a scam. Since 2015, about £10 billion has been lost to pension scams, according to the Pension Scams Industry Group, whilst Action Fraud recently warned savers to remain vigilant, estimating that £1.8 million has already been lost to pensions fraud in the first three months of this year. 

On 14 May 2021 the Department for Work and Pensions (DWP) published a consultation on draft regulations aimed at protecting pension scheme members from pension scams by requiring the trustees and managers of occupational and personal pension schemes to ensure that at least one of the following four conditions is satisfied before actioning a member’s transfer request.

• First Condition: This condition would be met if the trustees or managers identified that the transfer is to a type of scheme considered as at low risk of being a scam. Those types of safe scheme would include a public service pension scheme, an authorised master trust, an authorised collective money purchase scheme or personal pension providers operated by an FCA-authorised firm. If this condition were met, the transfer would be able to go ahead.  
  
  
• Second Condition: If the transfer were to a UK occupational pension scheme that was not low risk for the purposes of  the First Condition, then the transfer could only take place if the member demonstrated an employment link with the receiving scheme. The member would be required to provide evidence that contributions have been paid into the receiving scheme by them and their employer, as well as evidence of employment earnings from the receiving scheme’s sponsoring employer (such as payslips or bank statements).
  
  
• Third Condition: If the transfer were to a Qualifying Recognised Overseas Pension Scheme (QROPS), the member would be required to demonstrate either an employment link under the Second Condition or a residency link. The residency link would be demonstrated by evidence from the member that they have been resident in the same financial jurisdiction as the QROPS for at least six months. The draft regulations do not specify how a member should demonstrate a residency link, but the DWP expects that suitable evidence might include a residency document, visa or citizenship card or other formal proof of address.
  
  
• Fourth condition: Where none of the First, Second or Third Conditions were met, trustees and managers would then be required to  determine if there was evidence of red flags or amber flags. Where no flags are present, the Fourth Condition would be satisfied and the transfer could proceed. Where flags may be present, trustees and mangers could request information to assess the circumstances of the transfer and to determine whether the transfer is permitted. If the member failed to provide the requested information, there would be no statutory right to make the transfer.

Amber flags

• The circumstances that would give rise to amber flags are:

• there are high risk or unregulated investments included in the receiving scheme;
• where 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.

• Where amber flags are present, the transfer would be prevented unless the member had taken guidance on pension scams from the Money and Pensions Service (MaPS), or they have made a transfer to the same receiving scheme in the last 12 months and provided evidence of having taken MaPS scams guidance in that period.  This guidance would be required to be taken even where the member had taken regulated financial advice in relation to the transfer.

Red flags

• The circumstances that would give rise to red flags are where the trustee has 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;
• the member has been contacted unsolicited in person, by telephone, text, letter or email, or via social media;
• the member was offered incentives to transfer, including free pension reviews, 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.

• Where red flags are present, the transfer would be prevented.

The DWP, in conjunction with partners, has developed a set of standard due diligence questions for trustees and managers to use when assessing transfer requests.

The consultation will close on 9 June 2021 and the regulations will be introduced from autumn 2021, supported by guidance issued by the Pensions Regulator for occupational schemes and the Financial Conduct Authority for personal pension schemes.

Increasing the ability to block member transfers is likely to be welcomed by trustees and employers alike, giving greater options for protecting members benefits.  How the requirements will work in practice remains to be seen though. There will certainly be an increased administrative burden on pension schemes, and there will be a balance to be struck between ensuring that members benefits are protected and not unduly delaying legitimate transfers.