New pension transfer rights – immediate action required

Changes to statutory transfer rights for pension scheme members will come into force on 30 November. There is no transitional period and schemes should act now to ensure that their transfer processes and communications are updated to reflect the new requirements.

Background

In an effort to combat pension scams, the Pension Schemes Act 2021 imposes a requirement for certain conditions to be met before a member can transfer their benefits to another scheme. Earlier this year, the government consulted on a draft version of these conditions. Broadly, under the government’s proposals, one of four conditions would need to be met for the member to have a statutory transfer right:

1. The transfer was to one of certain schemes deemed to present a low risk of being a scam vehicle.
2. The transfer was to a UK occupational pension scheme and the member could demonstrate an employment link with that scheme.
3. The transfer was to a qualifying recognised overseas pension scheme (“QROPS”) and the member could demonstrate either an employment link (as under the Second Condition) or a residency link with that scheme.
4. For all other transfers, no amber or red flags were present. If an amber flag was present, the transfer would only be able to proceed if the member took pension scams guidance from the Money and Pensions Service (“MAPS”). If a red flag was present, the transfer could not proceed.

For more details, please see our June 2021 legal update.

Government response

The government has now responded to its consultation and has made some important changes to its proposals.

The First Condition remains, but Financial Conduct Authority-authorised personal pension schemes have been removed from the list of low risk schemes.

The Second, Third and Fourth Conditions have been merged into a single Second Condition. Where a transfer is to a UK occupational pension scheme or a QROPS, members will still need to provide evidence of an employment or residency link (as applicable), but schemes will now also need to be satisfied that no amber or red flags are present. If the trustees are not satisfied that the evidence provided does demonstrate an employment or residency link, this will be an amber flag.

As before, for all other transfers (now including transfers to UK personal pension schemes), schemes will need to determine whether any amber or red flags are present. Some minor changes have been made to the lists of amber and red flags. As proposed, the presence of an amber flag will mean that the member is required to take pension scams guidance from MAPS. The presence of a red flag will mean that the transfer cannot proceed.

Under the finalised due diligence requirements, it may be possible for trustees to maintain their own list of UK personal pension schemes where previous due diligence informs them that those schemes present a low scam risk. However, various conditions will need to be met in order for trustees to do this and trustees should therefore take advice if they wish to put such a list in place.

The new conditions will apply:

• For DB transfers, where the member requests a statement of entitlement on or after 30 November.
• For DC transfers, where the member submits a transfer request on or after 30 November.

Pensions Regulator guidance

The Pensions Regulator has also published guidance for trustees and administrators on dealing with transfer requests when the new conditions come into force.

Conclusion

The changes made by the government are intended to simplify the structure, and ease understanding, of the new conditions. However, implementing the new conditions will remain onerous and schemes will need to make substantial changes to their transfer processes and communications.

There is no transitional period after the new conditions come in – they will apply in full to all transfers initiated on or after 30 November – and schemes will therefore need to take action immediately to update their transfer processes and communications.

Even where a member does not have a statutory transfer right under the new rules, depending on how the scheme’s rules are written, the member may have a right to a transfer under the scheme’s rules, or the trustees may have a discretion to allow a transfer under the scheme’s rules. If this is the case, the position could get complicated, and we would suggest that trustees take advice on how the scheme and statutory transfer rights mesh.