Protecting members from pension scams proposed changes to transfer rights

The government is consulting on new conditions that will need to be met in order for a member to have a statutory transfer right. The new conditions are designed to help prevent transfers to scam vehicles which have claimed over £30m between 2017 and August 2020¹. The consultation closes on 9 June and the government intends to introduce the changes in autumn 2021. The Pensions Regulator is also expected to publish accompanying guidance.

The Pension Schemes Act 2021 imposes a requirement for certain conditions to be met before a member can transfer their benefits to another scheme. Under the government’s consultation proposals, one of four conditions will need to be met in order for a statutory transfer to proceed. Trustees will be required to give a member information about the conditions, and the need for one of them to be met, within one month of the earlier of the member requesting a transfer value quotation or making a transfer request.

The First Condition

The transfer is to one of the following types of scheme, all of which are deemed to present a low risk of being a scam vehicle:

• An authorised master trust.
• A personal pension scheme operated by an insurer that is (a) authorised and regulated by the Financial Conduct Authority and (b) authorised by the Prudential Regulation Authority, or within the same corporate group as such an insurer.
• A public service pension scheme.
• An authorised collective money purchase scheme².

The Second Condition

The transfer is to a UK occupational pension scheme and the member can demonstrate an “employment link” with the receiving scheme.

The employment link must be demonstrated by evidence from the member that:

• They have been employed by a receiving scheme employer for at least the previous three months.
• During those three months, they have received a prescribed minimum level of salary from the employer.
• During those three months, both they and the employer have contributed to the receiving scheme.

The required evidence will be set out in the regulations. If the member does not provide the required evidence, the transfer cannot proceed.

Alternatively, the Second Condition will be satisfied if the member provides evidence of having made a transfer to the same receiving scheme in the previous 12 months.

The Third Condition

The transfer is to a qualifying recognised overseas pension scheme (“QROPS”) and the member can demonstrate either an “employment link” (as under the Second Condition) or a “residency link”.

The residency link must be demonstrated by evidence from the member that they have been resident in the same financial jurisdiction as the QROPS for at least six months. The regulations do not prescribe the evidence that must be provided, but the government expects suitable evidence to include a residency document, visa or citizenship card, or other formal proof of address. The Pensions Regulator will produce guidance to support schemes in applying the residency link requirement.

If the member does not provide the required evidence, the transfer cannot proceed.

Alternatively, the Third Condition will be satisfied if the member provides written evidence of having made a transfer to the same receiving scheme in the previous 12 months.

The Fourth Condition

For all other transfers, trustees will be required to determine if any prescribed “red flags” or “amber flags” are present. Where the flags are not present, the transfer can proceed.

Amber flags

The amber flags are as follows:

• The receiving scheme includes high risk or unregulated investments.
• The fees being charged by the receiving scheme are unclear or high.
• The proposed investment structures are complicated or unorthodox.
• The receiving scheme includes overseas investments.
• One or more of the advisers are based overseas.
• There has been a high volume of transfers to a single receiving scheme or involving a single adviser or firm, or both.

Where one or more of the amber flags are present, the transfer will only be able to proceed if the member has taken scams guidance from the Money and Pensions Service relating to the specific dangers of scams and methods used by scammers. Upon completion of the guidance appointment, the Money and Pension Service will provide the member with a unique identifier which the member can provide as evidence that they have taken the guidance. The Money and Pensions Service guidance must be taken regardless of whether the member has, or is also required to take, independent financial advice in connection with the proposed transfer.

Alternatively, the Fourth Condition will be satisfied if the member provides evidence of (a) having made a transfer to the same receiving scheme within the previous 12 months and (b) having taken the Money and Pensions Service guidance in that period.

Red flags

The red flags are as follows:

• Financial advice has been provided by firms or individuals without the appropriate regulatory permissions, or such firms or individuals have recommended that the member make the transfer without formally providing financial advice.
• The transfer request has been made after the member received unsolicited contact about making a transfer from a previously unknown party.
• The member was offered an incentive to transfer.
• The member was pressured to make the transfer quickly.
• The member has failed or refused to respond to a request for information to enable the trustees to identify whether any red or amber flags are present.
• The trustees have identified one or more amber flags and the member has failed to provide evidence of having taken the Money and Pensions Service guidance.

Where one or more of the red flags are present, the transfer cannot proceed.

Trustees will not be required to seek information from the member to identify whether any red or amber flags are present, but will have the power to do so if needed. The government has developed a set of standard questions for trustees to use to help determine the presence of red or amber flags. If the member fails or refuses to provide information requested by the trustees, as set out above, this will be a red flag and the transfer cannot proceed.

Conclusion

Once the regulations are finalised and approved by Parliament, trustees will need to review their transfer due diligence processes with their administrators and ensure that they are compliant with the new requirements. If none of the four conditions are met, the member will not have a statutory transfer right. 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.