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Home / News and Insights / Blogs / Pensions / 67: New conditions for transfer payments – avoiding pension scams

On 8 November 2021, the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 were laid before Parliament. These regulations, which come into force on 30 November 2021, restrict the statutory right to transfer benefits with the aim of protecting pension scheme members from scams. The regulations are made under section 125 of the Pension Schemes Act 2021 and follow the DWP consultation on 14 May 2021 (see our previous blog).

Under the new regulations, trustees and scheme managers of occupational and personal pension schemes may only permit a transfer if one of two new conditions are satisfied (this is reduced from the four conditions set out in the consultation although the net result is broadly the same).

First condition

This condition will be met if the transfer is to low risk scheme: a public sector scheme, an authorised master trust or an authorised collective money purchase scheme (the latter two must also be on a list published by the Pensions Regulator). The consultation had previously included personal pension schemes operated by an FCA-authorised firm as low risk schemes but this was removed from the regulations and transfers to such schemes must now meet the second condition.

Trustees must satisfy themselves that the receiving scheme has the relevant credentials. If the trustees are satisfied beyond reasonable doubt about the nature of the scheme they may make payment without further checks and must confirm their conclusion to the member no later than the date of payment.

Second condition

This condition will be met if the transfer is to low risk scheme: a public sector scheme, an authorised master trust or an authorised collective money purchase scheme (the latter two must also be on a list published by the Pensions Regulator). The consultation had previously included personal pension schemes operated by an FCA-authorised firm as low risk schemes but this was removed from the regulations and transfers to such schemes must now meet the second condition.

Trustees must satisfy themselves that the receiving scheme has the relevant credentials. If the trustees are satisfied beyond reasonable doubt about the nature of the scheme they may make payment without further checks and must confirm their conclusion to the member no later than the date of payment.

In addition, if the transfer is to an occupational pension scheme members must demonstrate an ‘employment link’ and if the transfer is to a QROPS members must demonstrate a ‘residency link’. In order to help trustees put the new regulations into practice especially in relation to the second condition, the Pensions Regulator has issued guidance on dealing with transfer requests. Among other matters, this contains useful further detail on the evidence that will be relevant in demonstrating an employment link or a residence link.

Red flags

The listed red flags are as follows:

  • the member failed to provide the required evidence or information;
  • the member has not provided proof of taking the required MoneyHelper guidance where there is one or more amber flags;
  • a person without the required permission or exemption has carried out a regulated activity in connection with the transfer;
  • the transfer request is in response to unsolicited direct marketing;
  • the transfer request is in response to an incentive exercise (free pension review, cashback, early access etc); or
  • the member feels pressured to make the transfer.

Amber flags

The listed amber flags are as follows:

  • there are incomplete responses to requests for evidence or information;
  • the evidence or information provided may not be genuine or appears to have been given to the member in order to meet the requirements;
  • there is inconclusive evidence of the employment link or residency link; and,
  • the presence of: high risk or unregulated investments; unclear or high fees, unclear, complex or unorthodox investment structures; overseas investments; a suspicious increase in transfer requests connected with one receiving scheme or adviser.

The Pensions Regulator recommends trustees take a risk based approach to decision making in respect of the Second Condition. As such, it states that trustees may be able to rely on transfer experience in order to reach decisions, for example putting together a list of low risk personal pension schemes where due diligence has previously demonstrated no risk. This may offer a helpful way to ease transfers and avoid unnecessary and comprehensive due diligence questionnaires, but any such list should be reviewed and updated regularly and could not be relied upon as a cast iron defence in the event of subsequent complaint.

Where trustees or scheme managers do not have sufficient information to establish whether a red or amber flag exists, they may request such information from the member. The request should be reasonable and proportionate to the level of risk they believe is present and in making the request, trustees should clearly explain the reasons for requesting information. The appropriate methods for gathering information from pension scheme members should also be based on trustees’ understanding of their membership and existing processes.

Where a red flag is present, trustees and scheme managers may refuse to make the transfer. Trustees’ decisions should be based on the balance of probabilities ie do the trustees reasonably consider that there is a red flag based on the evidence and information available. It is not necessary to conclusively prove the existence of a red flag.

If trustees do refuse a transfer, they should notify the member of the decision and set out that there are factors which remove the statutory right to a transfer. Notification should be given within seven working days of the decision being reached and members should be reminded of the scheme’s internal dispute resolution process.

Commentary

Given the limited time until the regulations come into force, trustees and administrators will need to act quickly to update their processes. Trustees or transferring scheme managers must provide the member with information about the conditions for transfers within one month of either the date that the member requests a statement of the cash equivalent transfer value or the date the member requests to make a transfer, whichever happens first and so time is pressing.

A standard set of due diligence questions was included in the original consultation and these may remain helpful. Most schemes will already have scam avoidance processes in place in respect of statutory transfers but they should reconsider these in light of the new regulations. Trustees will need to balance proportionality with the requirement to obtain sufficient information in order to make an informed decision.

As noted, the Pensions Regulator has issued guidance which may be of help and otherwise trustees will need to liaise with their administrators and legal advisers. A key point is that the regulations do give trustees a legal right to refuse a transfer where there are serious concerns that the receiving scheme is connected to a scam. However, communication is likely to be key in reducing the risk of member complaint, especially where trustee concerns result in additional evidentiary burden on the members concerned.

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