The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations came into force today, 30 November 2021. These regulations place additional obligations on trustees in a bid to protect members from the risk of being scammed when they take a statutory transfer of their pension benefits out of a scheme.
Following the cold-call ban in 2011, scammers activities have become increasingly more sophisticated with them finding new ways to exploit vulnerable members. Last year, the FCA estimated over £30 million was lost to scams since 2017. The DWP acknowledge that this figure could be far higher as a result of the lag between a pension scam taking place and members finding out.
Whilst most transfers are legitimate and are able to proceed with minimal intervention or due diligence, there is a need for trustees to have a greater ability to intervene and prevent a transfer where there is a risk of a scam.
No additional due diligence needed for certain statutory transfers
Under the new requirements, trustees are not required to undertake any further due diligence or ensure that further checks are made (except to properly identify the receiving scheme) where a proposed statutory transfer is to a:
- Public service pension scheme,
- Master trust authorised by the Pensions Regulator, or
- A collective defined contribution scheme (which has been properly authorised), (the Exempt Schemes).
New obligations on trustees
Where a proposed statutory transfer is to an arrangement other than one of the Exempt Schemes, the trustees will need to undertake further due diligence and checks before the transfer can be made.
Transfers to occupational pension schemes (OPS) or qualifying recognised overseas pension schemes (QROPS)
If the transfer is to either an OPS or a QROPS, the trustees must request evidence from the member to demonstrate:
- In the case of an OPS, that there is an "employment link" between the member and the receiving scheme, and
- In the case of a QROPS that is not an OPS or where the member cannot show the "employment link" in the case of a QROPS that is an OPS, that there is a "residency link" between the member and the receiving scheme (i.e. that the member is resident in the country or territory in which the QROPS is established).
The regulations set out the evidence that the trustees must obtain in order to satisfy themselves that either the "employment link" or "residency link" exists.
Red and amber flags
Where the proposed statutory transfer is to an arrangement other than the one of the Exempt Schemes, the trustees must refuse to make the transfer where red flags are present. Where amber flags are present, the trustees must receive evidence that the member has taken advice from the Money and Pensions Service (MaPs) before the transfer can proceed.
Red flags are present when the trustees decide that either:
- The member has failed to provide a substantive response to a request from the trustees to try and establish the employment or residency link or where information as been requested by the trustees to decide whether any red or amber flags are present
- The member has not provided evidence of receiving the guidance from MaPs where required
- A person without appropriate regulatory status has carried on a regulated activity for the member in respect of the transfer
- 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 (other than an incentive by the sponsoring employer or the trustees of the transferring scheme or others authorised by them to offer such an incentive), or the member has been, or considers that they have felt, pressured to make the transfer.
Amber flags are present when the trustees decide that either:
- The information provided by the member is incomplete because not all of the evidence or information requested by the trustees has been provided
- Some or all of the evidence provided in response to the request for evidence or information from the trustees may not be genuine or may not have been provided directly by the member
- All of the evidence has been provided but it does not demonstrate the employment link or the residency link (as appropriate)
- There are high risk or unregulated investments included in the receiving scheme
- There are unclear or high fees being charged by the receiving scheme
- The structure of investments in the receiving scheme is unclear, complex or unorthodox
- There are overseas investments included in the receiving scheme
- 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).
Under the regulations trustees are able to request such evidence and information concerning the circumstances relating to the transfer as they consider relevant in order for them to decide if any red or amber flags are present in respect of a particular transfer.
Other administrative requirements
The regulations also require trustees to take additional administrative steps when dealing with statutory transfers under the new regime. These include notifying members within one month of their application to take a cash equivalent transfer value that their application will be assessed against the new requirements (unless the transfer is made within that period). Members must also be notified of the trustees' decision within the timescales specified in the accompanying guidance issued by the Pensions Regulator (which can be found here: New regulations empower trustees to halt suspicious transfers | The Pensions Regulator).
Technically the new requirements only apply to statutory transfers. However, the guidance from the Pensions Regulator states that where scheme rules permit non-statutory transfers trustees should consider the checks in the guidance when assessing whether to grant a non-statutory transfer.
The Pensions Regulator also warns that trustees should not use non-statutory transfers to avoid carrying out due diligence to satisfy the new requirements and that their expectation is that trustees will carry out enough due diligence on a non-statutory transfer to be confident that they have fulfilled their fiduciary duties to the transferring member.
For a good while now trustees have needed clearly defined statutory provisions to allow them to stop or pause transfers where there was suspicion of a pensions scam in operation. The new powers set out in the regulations give trustees the statutory framework to help combat pension scams, but at the cost of an additional due diligence and administrative burden for trustees.
Trustees will need to work closely with their legal advisers and pension scheme administrators to ensure that:
- Robust processes are put in place to comply with the new obligations, and
- Trustees are not inadvertently exposed to further risk for non-compliance with the new measures.
Please get in touch with your usual Womble Bond Dickinson pensions team contact if you would like any further information on these issues.