Pensions Alert - New requirements for statutory transfers

On 8 November the DWP published the government response to its May 2021 consultation on draft regulations prescribing additional conditions that must be met in order for a member to have a statutory right to transfer. The final version of the regulations – the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 – were also laid before Parliament on 8 November and will apply to statutory transfer requests from 30 November 2021. The Pensions Regulator also issued guidance in relation to the new Regulations on 8 November.

The Regulations are made under a power introduced by the Pension Schemes Act 2021 to address the issue that, under the current legislation, if a member has a statutory right to transfer, trustees are required to comply with the request even if they have concerns in relation to pension scams. The response to consultation states that the Regulations ensure that trustees will now have the tools to act where suspicions about the circumstances that have prompted the transfer request are identified.

The new Regulations will come into force in less than three weeks’ time. Trustees should take action now to ensure that their transfer processes are updated in time.

The May consultation

The May consultation proposed that trustees or scheme managers of occupational and personal pension schemes would be required to ensure that at least one of four specified conditions is met before they make a statutory transfer. In summary, those conditions were that: (1) the receiving scheme is within a list of types of receiving scheme which present a low scams risk; (2) in the case of a transfer to an occupational pension scheme not of a type on that list, the member can demonstrate an “employment link” with the proposed receiving scheme; (3) the member can demonstrate a “residency link” to a proposed receiving scheme that is a Qualifying Recognised Overseas Pension Scheme (QROPS); and (4) the trustees consider whether any specified red flags and amber flags are present, and if none are present, the transfer can proceed, but if there are red flags the transfer cannot proceed, and if there are no red flags but there are amber flags, the transfer can only proceed if the member receives pension transfer scams guidance from the Money and Pensions Service (MaPS).

Changes made to the draft regulations

There have been some significant changes to the Regulations since the consultation draft including the following.

• Rather than setting out four conditions, the final version of the Regulations only specifies two conditions.
• The First Condition continues to provide a list of types of receiving scheme to which transfers can proceed without the trustees completing further checks. However, the list has been changed since the consultation draft and now only includes public service pension schemes, authorised master trusts and authorised collective money purchase schemes. A key change is that transfers to personal pension schemes operated by FCA registered and PRA authorised insurers can no longer proceed based on the First Condition.
• The other three conditions in the consultation draft (relating to the employment link, the residency link, and red and amber flags) have been merged into one new Second Condition, allowing for a holistic consideration of the employment and residency links with the red and amber flags. Some amendments have also been made to the drafting of the links and the flags since the consultation.
• The Second Condition applies to all transfers to which the First Condition does not apply. Transfers to which the Second Condition applies can now be divided into two broad types – Type 1 and Type 2. In summary: (1) Type 1 transfers enable trustees to proceed, in certain circumstances, on the basis of evidence and information they already hold if they conclude on the balance of probabilities that certain red and amber flags are not present, but this route cannot be used if the proposed receiving scheme is an occupational pension scheme or a QROPS; (2) in the case of Type 2 transfers to an occupational pension scheme or a QROPS, specified evidence must be requested in relation to the employment link or residency link (as applicable); (3) irrespective of the type of receiving scheme, in relation to Type 2 transfers, the Regulations give trustees the power to request from the member such evidence or information concerning the circumstances relating to the transfer as they consider relevant in order to decide if the red or amber flags are present; and (4) the way that the relevant flags are assessed and the standard of proof used differs between Type 1 and Type 2 transfers.

Comment

DLA Piper partner Matthew Swynnerton is a member of the Pension Scams Industry Group (PSIG), who have worked closely with the DWP in relation to the new Regulations.

We believe that regulatory intervention which protects pension savers against scammers is to be welcomed and, for some time, the statutory transfer right has placed trustees and providers in an invidious position when faced with a statutory transfer request to a suspected scam vehicle. This dilemma was brought into sharp relief when the High Court overturned the Pensions Ombudsman’s decision in Hughes v The Royal London Mutual Insurance Society Limited. Giving trustees and providers greater powers to block transfers to scam vehicles and refer members for guidance from MaPS where there are signs of a potential scam will help the industry better protect members.

Whilst we welcome the policy intent behind the new Regulations, we expect that some of the industry feedback will focus on the impact the Regulations will have on legitimate transfers. In attempting to address responses from a wide-range of stakeholders to the consultation, the final version of the Regulations is quite complex and contains significant changes compared to the version consulted on. In some cases, the due diligence process will not be straightforward.

The implementation date is just three weeks away, and before then all trustees and providers will need to consider their current transfer processes in light of the new regime. Trustees will need to continue to be mindful of statutory transfer deadlines and, bearing in mind the complexity of some aspects of the Regulations, should not delay undertaking this review. Some suggested immediate actions are set out in the following section, however we would recommend that you take legal advice and liaise with your administrators in relation to the Regulations as soon as possible.

There are also a handful of complicated areas in respect of which we expect trustees may require legal advice. These include:

• the extent to which “green lists” will be used and whether it will be possible to conclude on the balance of probabilities that none of the amber flags is present without having to go through a detailed due diligence exercise or contacting the member. In particular, the amber flag relating to receiving scheme overseas investments is particularly broad and there is a possible disconnect between the policy intent stated in the consultation response and the Pensions Regulator’s guidance and the actual wording of the Regulations; and
• the use of discretionary transfer powers. Whilst the Regulations only apply to statutory transfers, trustees will also need to consider whether there are any separate transfer rights under their scheme rules and the extent to which they will use such powers and whether any changes should be made to the due diligence processes in relation to such transfers in order to comply with their trustee duties and regulatory guidance.

Immediate next steps for trustees

Trustees should take advice on the new requirements as soon as possible and consider what changes need to be made to their existing transfer processes in light of the Regulations, including:

• when it might be appropriate for them to use the Type 1 route referred to above;
• considering which cases should be referred to the trustee board, and how the trustee will determine whether certain subjective tests are met;
• any updates needed to the evidence or information they request from members when completing due diligence on transfer requests;
• ensuring the correct standard of proof is applied to their decisions;
• the trustees’ position in relation to some of the complex areas highlighted above, including the extent to which:

• enhanced due diligence will be required due to the difficulty of concluding “on the balance of probabilities” that no amber flags are present, even where the transfer is to a “green list” scheme; and
• discretionary transfer powers will be used, and the level of due diligence that should be applied to such transfers.

     These are areas in respect of which legal advice is likely to be required;

• reviewing and updating transfer communications in light of the new obligations to ensure members who request a transfer are notified of the new conditions and whether they have been met in respect of their request; and
• whether to revisit any updates they have been planning to their processes on the basis of the draft regulations to check whether these remain appropriate in light of the significant changes that have been made to the Regulations since the consultation draft.

With the Regulations applying to statutory transfer requests from 30 November, trustees should liaise with their administrators now, and seek legal advice where needed, in order to ensure that their transfer processes are updated in time.