New transfer value regulations and Regulator guidance to protect pension members from scammers – act now

Insight shared by:

Gateley Legal

Article by

New regulations will come into force on 30 November 2021, designed to protect pension scheme members from scam activity.

These new regulations will require the transfer procedures and processes of pension arrangements to be reviewed and updated, to ensure compliance with the new legislation from the end of this month.

We set out below further detail about the new requirements and what trustees and administrators should be doing over the next few weeks.

The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 were laid before Parliament on 8 November 2021 (see our 14 May 2021 Insight Update for details of the consultation on the draft regulations and see here for the DWP's response) and will come into force on 30 November 2021. They will apply where a member asks for a cash equivalent transfer value statement or, in any other case, requests a transfer on or after this date. 

At the same time, the Pensions Regulator has published ‘Dealing with transfer requests’ guidance to assist "trustees understand their new powers to halt suspicious transfers". This guidance provides a clear explanation of how the new provisions will operate in practice.

Trustees will need to liaise with the scheme's administrators to check existing due diligence processes and make changes where necessary to accommodate the new requirements. They will also need to arrange for relevant member communications to be produced (see Member Communications Section below). This will need to be done swiftly given the new requirements come into force at the end of this month.

The revised transfer value regulations

The regulations are intended to increase protection for members and help prevent pension scams by requiring trustees and managers to make sure that one of two conditions is met before a statutory transfer takes place. 

The First Condition: Transfers to certain types of scheme

No further checks are needed where trustees are "satisfied beyond reasonable doubt" that the transfer is being made to an authorised and listed master trust, an authorised and listed collective defined contribution scheme or a public service scheme. If the First Condition is satisfied the transfer can proceed.

The Second Condition: Transfers to all other receiving schemes 

The Second Condition covers transfers to all other receiving schemes. 

Trustees must determine if scam indicators, in the form of 'red flags' or 'amber flags' are present. 

Red flag: A red flag means the transfer cannot proceed – there is no statutory right to transfer. 

Amber flag: An amber flag means the member must obtain (and provide evidence of having obtained) scams guidance from the Money and Pensions Service (MaPS). The transfer should be stopped if the member has not taken MaPS’ guidance or they have taken such guidance but then withdraw their request to transfer. Providing evidence of having obtained MaPS’ guidance means that the transfer can go ahead even if trustees remain concerned about possible scam activity.

In addition: 

  • an employment link must be evidenced where the receiving scheme is an occupational pension scheme; 
  • an employment or residency link must be demonstrated where the receiving scheme is a qualifying recognised overseas pension scheme (a QROPS) that is an occupational pension scheme; and
  • a residency link must be shown where the receiving scheme is a QROPS that is not an occupational pension scheme. 

Transfers to occupational schemes or QROPS are estimated by the Pension Scams Industry Group (PSIG) to cover just 5% of cases. The remaining 95% are to other types of schemes.

If, on the "balance of probabilities", trustees cannot decide whether red or amber flags are present, they should request further details and have the power to ask for such evidence or information as they consider relevant.

Employment link (occupational scheme)

The evidence needed includes:

  • a letter from the member’s employer confirming the member's continuous employment, the date from which the member was employed and that the employer is the sponsoring employer of the receiving scheme;
  • a schedule of contributions or payment schedule showing employer and member contributions covering the last 3 months;
  • 3 months' written evidence of salary at or above the lower earnings limit; and
  • copies of bank or building society statements or passbook evidencing the last three months' deposit of salary.
Residency link (overseas scheme)

The member must show formal residency documentation and at least two other pieces of written evidence demonstrating residency in the country or territory in which the QROPS is established prior to the date the transfer application is received.

Failure to provide substantive employment or residency link evidence = red flag.

Insufficient employment or residency link evidence/concerns as to whether genuine/not provided by member directly = amber flag.

The Second Condition: Red flags
  1. Member fails to provide substantive response to request for evidence or information in relation to the Second Condition
  2. Member fails to provide evidence of having taken MaPS’ guidance when requested to do so
  3. An individual has carried out regulated activity for the member without appropriate regulatory status
  4. Unsolicited contact with the member
  5. Member offered incentive to transfer
  6. Member pressured to transfer
The Second Condition: Amber flags
  1. Member has provided substantive response to request for evidence or information but response incomplete
  2. Evidence provided in relation to Second Condition may not be genuine or provided by member directly
  3. All evidence needed from member in respect of the employment and/or residency link is provided but this does not demonstrate the link
  4. High risk or unregulated investments included in receiving scheme
  5. Unclear or high receiving scheme fees
  6. Unclear, complex or unorthodox investment structure of receiving scheme
  7. Overseas investments in the receiving scheme
  8. Sharp or unusual rise in transfer requests involving same scheme and/or same adviser

The Regulator's guidance provides examples of things that trustees should think about when considering the presence of flags. It also includes a transfer process decision tree at Appendix 1.

Whilst the regulations set out the information needed to evidence the residency and employment link, it is up to trustees to determine what other evidence, if any, they need to determine if any other flags are present.

Non-statutory transfers

The Regulator’s guidance notes that due diligence should still be undertaken in line with the guidance where a member does not have a statutory right to transfer but is able to do so under the scheme rules.

Refusing a transfer

A decision as to whether a transfer should be refused should be made on the "balance of probabilities". An audit trail of the consideration and decision process and the contact with the member should be retained. Suspicions of a scam should be reported to the relevant bodies – see the ‘report a scam’ section of the Regulator's ‘Avoid pension scams’guide.

Member communication

There are various points during the new regime when members must be communicated with.

Members should be told that one of the two conditions must be satisfied within one month of the date of the transfer application or request being made (unless the transfer has already gone ahead).

The member must also be notified where either condition is met, no later than the date the member is informed that the transfer has taken place.

The timescale for informing a member that a transfer cannot go ahead and that, if applicable, they have lost their statutory right to transfer out in respect of that request is quite short; members must be informed within seven working days of the decision to refuse the transfer being made.

Revisiting a decision

A decision that neither condition is met can be reconsidered where the trustees realise that a wrong decision was made, or the member provides additional evidence or information and there was 'good reason' for the delay which has been 'no longer than necessary'.

Scams code

PSIG’s 'Combating Pension Scams: a Code of Good Practice' is currently being revised and an updated version should be available later this year.

Government review

The Government will review the regulations within 18 months to check that they are still as "effective as possible in targeting evolving methods used by scammers".

Whilst having a more robust and prescribed process for determining whether a transfer does constitute scam activity is to be welcomed, where the information obtained only constitutes an amber flag under the regulations and the member obtains MaPS’ guidance, trustees will still need to proceed with a transfer even where scam activity is suspected.

In light of this, it is important that trustees carefully document the evidence they have obtained and their decision-making processes to protect themselves against complaints in the future, especially where the transfer seems suspicious. In addition, previous transfer requirements should continue to be complied with, including providing the Regulator’s Scorpion Guide.

With little time before these new regulations come into force, trustees should be liaising with their administrators to ensure their transfer processes and procedures have been updated accordingly and the required member communications produced. The Pensions Ombudsman is unlikely to look favourably on schemes that are not compliant with these new requirements from the end of this month.

Gateley Plc is authorised and regulated by the SRA (Solicitors' Regulation Authority). Please visit the SRA website for details of the professional conduct rules which Gateley Legal must comply with.

Got a question? Get in touch.