50: DWP publishes consultation on new requirements for pensions transfer requests
On 14 May 2021, the Department for Work and Pensions published a consultation on draft regulations which will restrict the statutory right to transfer, with the aim of protecting pension scheme members from scams.
At present pension scheme trustees are not able to stop a statutory transfer even where they have concerns that a pension scam may be involved. Under the new regulations, trustees and scheme managers of occupational and personal pension schemes will only be allowed to proceed with a transfer if one of four new conditions are satisfied:
This condition will be met if the transfer is to one of a list of low risk schemes set out in the regulations which have been appropriately established or authorised. If so, the transfer can proceed without any further checks. Low risk schemes include public service pension schemes, authorised master trusts, and personal pension schemes operated by an FCA-authorised firm.
If the transfer is not to a low risk scheme, the second condition applies: the transfer must be to an occupational pension scheme and members must demonstrate an ’employment link’ between themselves and the receiving scheme. To demonstrate an employment link the member must show that:
- their employer sponsors the scheme;
- they have been employed with the sponsoring employer for at least 3 months;
- they receive a minimum level of salary; and
- both they and the employer contribute to the scheme.
Trustees must request from the member evidence prescribed in the draft regulations, such as a letter from the sponsoring employer, pay slips, or bank statements or they must demonstrate that they made a previous transfer to the scheme within the last 12 months. Once evidence is received, the trustees must decide whether, on the balance of probabilities, the evidence demonstrates the employment link.
This condition applies to transfers to a qualifying recognised overseas pension scheme (QROPS) where no employment link can be demonstrated. Members must prove a ‘residency link’ by demonstrating that they have been resident in the same financial jurisdiction as the QROPS for at least six months. Again the required evidence is prescribed in the draft regulations and the trustees must decide whether the link is demonstrated on the balance of probabilities. Alternatively, instead of demonstrating a residency link, a transfer can proceed if the member provides satisfactory evidence of a transfer to the same receiving scheme in the last 12 months.
Where none of the first three conditions are met, the fourth condition requires that trustees and scheme managers must assess whether any red or amber flags are present.
Red flags arise where trustees or scheme managers have a reasonable belief that advice has been provided by a firm without appropriate regulatory permissions, that the member has received unsolicited information, or that the member was offered incentives to transfer; or if a member has refused to provide the information requested by trustees or to demonstrate that they taken specific guidance on scams from the Money and Pensions Service (MaPS). If a red flag is present trustees may not make payment of the transfer.
Amber flags include high risk or unregulated investments in the receiving scheme; unclear or high fees; or unorthodox or complicated investment structures. Where there is an amber flag, in order for payment to be made the member will be required to provide evidence that they have taken the MaPS scam guidance or that they have made a previous transfer to the receiving scheme in the last 12 months and provides evidence of having taken MaPS guidance in that period. This will empower members to proceed where they are aware of the risk of a scam.
In both cases, MaPS will provide a unique identifier to members to use as evidence. If trustees request evidence of MaPS guidance having been taken and the member does not provide it, this will constitute a red flag and trustees will not be able to make the transfer payment.
Provision of information
Trustees or managers of the transferring scheme will be required to provide the member with information about the conditions for transfers set out in the draft regulations, and the requirement for at least one condition to be satisfied before a transfer can proceed, within one month of either the date that the member requests from them a statement of the cash equivalent value of their transferrable rights or the date the member requests to make a transfer, whichever happens first.
A standard set of due diligence questions is included in the consultation. It is also expected that the Pensions Regulator and the FCA will provide guidance for trustees and scheme managers on the new regulations, and that each regulator will use their current powers to address non-compliance.
Although the proposed regulations will result in more administration, trustees and managers will, for the first time, have a legal right to refuse a transfer where there are serious concerns that the receiving scheme is connected to a scam. It does however, add new obligations for trustees with the risk of member complaint if they get those obligations wrong.
The consultation closes on 10 June 2021, with the regulations expected to be in force from autumn 2021. This means that occupational and personal pension providers should be preparing to implement the new requirements, for example, by updating processes and communications to members.