Part 1 – Transfer Regulations – do they provide enough protection?
24 / 11 / 2021
We are seeing a significant increase in the number of member complaints against trustees relating to pension scams. There is no doubt that these scams can be devastating to members and often leave individuals financially destitute in their final years.
A number of steps have been taken in the past with the goal of protecting members from scams, with the Pension Regulator’s famous Scorpion leaflet which warned members that there were predators stalking their pensions – that leaflet was first published in 2013 and is still used today to warn members of the potential risks of transferring their benefits out to something that seems too good to be true.
Following two years later was the further layer of protection added by the Pension Schemes Act 2015 which imposed a legal requirement on trustees/their scheme managers to ensure members seeking to transfer funds of £30,000 or more had taken independent financial advice from an FCA authorised adviser.
From our experience these steps have helped, to some degree, to raise awareness and reduce the number of scam (or liberation) transfers which proceed. However, it is widely accepted that these measures aren’t sufficient – members are still being scammed out of their hard-earned pension savings.
With this in mind the Pension Schemes Act 2021 and the regulations thereunder provide trustees with greater power to stop transfers being processed in certain circumstances.
With that increased power comes increased obligations – so what do Trustees and their administrators need to know?
The first critical point is that the obligations have applied since 30 November 2021 – so if you haven’t already addressed this we’d encourage you to do so urgently.
What do you need to do from 30 November 2021?
trustees and scheme managers will be required to conduct certain checks before permitting a transfer from their scheme. The checks consist of two conditions:
Condition 1 will be satisfied if the transfer is being made to a “Safe Destination Vehicle” namely:
- a public sector scheme;
- an authorised master trust; or
- an authorised collective money purchase scheme.
If the arrangement features in the above list the trustees do not need to consider Condition 2 – the transfer can proceed without further due diligence in relation to the new transfer regulations. Of particular interest is that personal pension schemes were included in the safe vehicles destination list in the draft regulations, but no longer feature. Transfers to personal pensions account for the vast majority of transfers-out, meaning the majority of transfers will need to be tested against Condition 2.
Condition 2 will be satisfied if the transfer does not exhibit any red flags (defined in the regulations). Trustees are under a duty to carry out checks to identify the presence of red and amber flags.
Red flags include:
- an unsolicited approach to the member regarding their transfer; and
- the member was offered an incentive to transfer.
Amber flags include:
- incomplete responses to requests for information;
- evidence does not demonstrate employment or residency risk; and
- investments in the receiving scheme are unregulated, unclear, complex or unorthodox.
Where any flag exists the Trustees should consider whether further due diligence should be completed and whether the transfer should proceed. The examples of red and amber flags provided above are not the exhaustive lists but they do clearly demonstrate the added burden this will place on trustees and their administration teams.
The Pensions Regulator has issued guidance to assist trustees and scheme managers navigate the new duties. In that guidance the Regulator states “You should take a risk-based approach to your decision making based on the information you obtain during your due diligence process“. This re-enforces what we have all known for some time – there is an ever-growing burden on trustees. The level of due diligence which trustees and their administrators will need to carry out is about to increase exponentially.
The Pensions Regulator is also asking trustees, providers and administrators to officially pledge to do more to protect scheme members and follow the principles of the Pension Scams Industry Group (PSIG) Code of Good Practice (the pledge form can be accessed and completed on the Pensions Regulator’s website).
Whilst this is a step in the right direction it isn’t going to be a magic solution. The regulations won’t help the thousands of members who have already been duped out of their pensions – a situation which often remains undetected by the member for years – making their position all the more devastating.
Furthermore, the new transfer provisions will not provide any protection in relation to non-statutory transfers. Why is this of concern? There are two main reasons:
- members do not have a statutory right to transfer their benefits if they are within one year of their normal retirement. Savvy scammers targeting members within one year of their normal retirement date will encourage members to request a non-statutory transfer; and
- members whose statutory transfer requests are declined under these new protections may still apply for a non-statutory transfers.
It is therefore vital that trustees and their administrators review and understand their non-statutory transfer provisions. From our experience, more often than not scheme provisions provide a discretionary power to grant non-statutory transfers.
Trustees should now.
- Enter into a dialogue with their scheme administrators to ensure:
a. the scheme administrators are aware of these extra duties and that they have adequate procedures, policies and the resource to comply with these requirements;
b. appropriate communications are being issued to members; and
c. the trustees understand any cost implications which may arise from these new duties.
- Ensure they understand their scheme’s non-statutory transfer provisions.
- Consider whether they have appropriate procedures in place and adequate resource to consider:
a. cases where there are amber or red flags?; and
b. non-statutory transfer requests (if the scheme’s provisions permit these).
- Consider whether they need further training in relation to these new obligations.
Please look out for my article “Scam! Bam! Thank you Ma’am” in the recently published edition of IFA Magazine for further discussion of this topic!