Scam pension transfers are unfortunately still very rife in the pension industry and have been for many years now. Scheme members are often tempted to transfer their pension savings to bogus schemes by promises of free pension reviews or early access to tax-free cash, only to find that their retirement provision has been wiped out by scammers, with no way of recovering it.
The Financial Conduct Authority (FCA) reported that over £2.2 million had been lost to pension scammers between January and May 2021, with the actual number likely being much higher. Such is the continuing high number of pension scams that Pensions Regulator (TPR) last year launched its pledge to combat pension scams campaign asking key players in the pensions industry to commit to six principles in the interests of protecting pension savings. This was then backed up by significant new legislative powers being enacted at the end of last year that enable trustees and scheme managers to refuse transfer requests where they suspect it may be a scam transfer. We take a look at these new powers and the implications of them below.
The background and statutory framework
Section 125 of the Pension Schemes Act 2021 (PSA) amends the statutory pension transfer provisions so that a statutory transfer can only take place where certain conditions are met. It also introduced an enabling power allowing secondary legislation to be passed setting out the detail of these new conditions.
The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (the Regulations) came into force on 30 November 2021 and specify two conditions, either one of which require to be satisfied for trustees and scheme managers to allow a transfer of savings to be processed. The Regulations apply to an application for a defined benefit pension transfer statement of entitlement or a request to transfer money purchase pension benefits, which is received on or after 30 November 2021.
The conditions
The first condition is that the transfer is being made to a 'low risk scheme'. Such schemes include public sector schemes, as well as authorised master trusts and authorised collective money purchase schemes which appear on a list published by TPR. Trustees and scheme managers must be satisfied, beyond reasonable doubt, of the receiving scheme's credentials, which they must establish themselves – all they can ask of a member is to provide them with the necessary details to ascertain the right receiving scheme. If they are satisfied it meets this first condition the transfer may go ahead. If this condition is not satisfied, then the second condition applies.
The second condition can be split into two types: those where a red flag is present and the transfer cannot proceed and those where there are amber flags but other conditions are met (see below) allowing it to proceed.
The trustees and scheme managers must satisfy themselves on the balance of probabilities that the circumstances of the transfer do not raise any 'red flags'. The red flags are that the trustees or transferring scheme managers decide:-
- The member has failed to provide a substantive response to requests for evidence or information;
- The member has failed to produce the required evidence that, due to the presence of one or more amber flags in respect of the transfer, they took guidance from the Money and Pensions Service (MaPS);
- A person without the appropriate regulatory status has carried on a regulated activity for the member in respect of the transfer;
- The transfer request has been made in response to unsolicited contact for the purpose of direct marketing of the transfer;
- The member has been offered an incentive to make the transfer; or
- The member has been, or considers that they have felt, under pressure to make the transfer.
In addition to ascertaining whether there are red (or amber) flags, specified evidence must also be collected by trustees and scheme managers of an employment link if the transfer destination is an occupational scheme (that isn't covered by the first condition) and of a residency link if the destination is a qualifying recognised overseas pension scheme. They are given discretion to request other evidence or information necessary to establish if any red or amber flags are present which, in most circumstances, must be given directly to them by the member.
The amber flags are that the trustees or transferring scheme managers decide:-
- A member has provided an incomplete response to a request for evidence or information;
- There is evidence that some or all of the evidence or information provided in response to a request may not be genuine or may not have been provided directly by the member;
- The evidence provided does not demonstrate the employment or residency link;
- There are high risk or unregulated investments included in the receiving scheme;
- There are any unclear or high fees being charged by the receiving scheme;
- The structure of investments included in the receiving scheme is unclear, complex or unorthodox;
- There are any overseas investments included in the receiving scheme; or
- There has been a sharp or unusual rise in the volume of requests to make a transfer from the transferring scheme involving the same adviser/firm of advisers (or both).
If any amber flags are considered to be present, trustees and scheme managers must be provided with proof by the member that the member has sought independent MaPS guidance on the matter before the transfer can go ahead. MaPS will provide a unique identifier to members who have completed the guidance for this purpose.
The key point though that if trustees or scheme managers are not satisfied that either the First or Second condition has been met, the member loses their right to a statutory right to a transfer.
What does this mean for trustees and scheme managers in practice?
These new powers will be an important tool for trustees and scheme managers in that they are now legally allowed to stop transfers to potential scammers, even when members are putting pressure on them to allow the transfer to go ahead. Up until the new Regulations were introduced, there were no legislative powers that could be relied upon to refuse a member's request to transfer which resulted in some well publicised Pension Ombudsman decisions where the trustees were ultimately held to be in breach of their duties for not allowing the transfers to proceed. Therefore, these are very significant new legislative powers which were much lobbied for and should give Trustees the legal protection that was previously missing when taking the decision to refuse a transfer request.
However, it is important that trustees and scheme managers record their rationale for decisions carefully to mitigate against the risk of member challenges. They do not need to limit themselves to information supplied by members for these purposes – TPR suggests that trustees and scheme managers could carry out due diligence on a set of schemes and produce a list of those that carry a low scam risk, provided this is regularly reviewed and updated.
Where a member applies for a DB statement of entitlement or makes a transfer request, trustees and scheme managers must inform the member about the transfer conditions within one month of the date of the application or request (unless the transfer is made before that date). They must be given notice that a condition has been satisfied no later than the date of confirmation that the transfer payment has been made. If it is decided that neither condition is satisfied, a member must be notified of this within 7 working days.
A final point to note is that guidance from TPR was also published in November 2021 to assist trustees and scheme managers in interpreting and exercising their new powers.
Brodies' leading Pensions team is well placed to assist trustees and scheme managers with interpreting these new statutory transfer powers and restrictions and advising on their implementation in practice to ensure compliance. If you would like to discuss anything raised by this blog, please get in touch with a member of the team.
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