The Department for Work and Pensions (DWP) recently consulted on the conditions that will need to be met in order for members to have a statutory transfer right. The consultation closed on 10 June and it is expected that the new regulations, which will help trustees protect members’ interests from scammers, could come into force in autumn 2021.
It’s so important that we get this right. I thought that it would be helpful to bring together a short background with a summary of both the conditions and the flags all in one place.
Background
Official figures on pension fraud show there were approximately 3,000 crime reports received by Action Fraud between January 2015 and December 2019. Financial Conduct Authority figures show that over £2 million has been lost in pension scams so far this year. Most commentators, however, believe these figures don’t represent the true scale of the issue as many scams are not reported. A 2018 survey by the Pensions Scams Industry Group (PSIG) estimated that 5% of all transfer requests were identified as potential scams. Trustees are currently often powerless to prevent transfer requests that they are concerned about from going ahead.
Guy Opperman MP, Parliamentary Under-Secretary of State at the DWP, describes pension scams “as a menace that cost people their life savings, and have a devastating financial and emotional impact on their victims.” The new measures have received cross-party support and Mr. Opperman says he wants to bring forward the proposals as soon as possible.
The proposed regulations will help to formalise the requirement that already exists for trustees and scheme managers to carry out due diligence with regards to transfers, by setting out conditions that must be met. The proposals require one of four conditions to be met before a statutory transfer can proceed – and trustees are responsible for communicating this to members within a month of them expressing an interest in a transfer. It’s vital, therefore, that trustees are fully up to speed with the new proposals.
Conditions of transfer
Condition one ensures there is a low risk that the transfer is a scam as it has to be made to a public service pension scheme, an authorised master trust, an authorised collective money purchase scheme, or a personal pension provider with an insurer that is authorised and regulated by the Financial Conduct Authority and authorised by the Prudential Regulatory Authority, or within the same corporate group as such an insurer.
Condition two asks that the transfer is to a UK occupational pension scheme and the member can show an “employment link” with the receiving scheme such as pay slips, bank statements etc. proving that the member has been employed for at least three months prior to the date of the transfer request, has received a prescribed minimum level of salary, and that both they and the employer have contributed to the receiving scheme during those three months.
Condition three requires that the transfer is to a qualifying recognised overseas pension scheme (“QROPS”) and the member can demonstrate either an “employment link” (as above in Condition two) or a “residency link” (of at least 6 months) using visa or citizenship card or similar. The Pensions Regulator will prepare guidance to assist schemes in obtaining evidence of the residency link requirement.
Conditions two and three can also be met if the member can provide evidence of a transfer to the same receiving scheme in the last 12 months.
Condition four puts the onus on trustees to look for red or amber flags before allowing the transfer to proceed.
The flag system
Where amber flags are identified, the transfer will only be able to go ahead if the member has taken expert scams guidance from the Money and Pensions Service (MaPS) who will then provide the member with a unique identifier which the member must provide as proof that they have taken the guidance. If amber flags are present, members must take scams guidance from MaPS, even if they have taken advice from a regulated independent financial adviser.
Amber flags are present if the receiving scheme includes excessive risk or unregulated investments, if the fees being charged by the receiving scheme are vague or high, if the proposed investment structures are complex or unconventional, if the receiving scheme includes overseas investments or one or more of the advisors are based overseas, and if a single receiving scheme or a single adviser or firm, or both, are linked to a high volume of transfers.
Red flags include firms or individuals providing financial advice without having the proper regulatory permissions, or if they have recommended that the member makes the transfer without providing formal financial advice. Unsolicited contact from someone that the member previously didn’t know, which prompted the member to make the transfer request, would also be a red flag, as would the member being offered an incentive to transfer or being pressured to do so quickly.
In addition, if the member has not provided the information to enable the trustees to identify whether any red or amber flags are present, if they have failed to provide evidence that they have taken MaPS guidance, or if they have not responded to a request for information, it’s considered a red flag situation. Should the trustees find any red flags, the transfer may not go ahead.
Trustees under pressure
Despite concerns, trustees sometimes have little reason to refuse a member’s request for transfer and, while my colleagues and I welcome this evolution, we also acknowledge that it does generate more pressure particularly around due diligence. The government has developed a set of standard questions to help trustees, but we know that some schemes will be seeking further support. Our team at 20-20 Trustees has the experience to provide expert support and would be happy to help others navigate the ever-increasing governance burden.