In depth

Pensions legislation and case law update: the latest developments week ended 14 May 2021

Gateley Legal

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In this week’s update, we provide a round-up of the latest developments in pension scams including the consultation on the new transfer regulations, the pension measures included in the Queen’s Speech, the latest PPF 7800 Index funding figures, an update on the Pensions Dashboards Programme and the FCA’s consultation on the new Long-Term Asset Fund category.

Pension scams: latest developments

1. Consultation on draft transfer regulations

The Department for Work and Pensions (DWP) has published its consultation on the draft Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (the Transfer Regulations), which will be introduced under the regulation-making power introduced by the Pension Schemes Act 2021.

The Transfer Regulations are intended to address potential shortcomings with the present transfer regime and to increase protection for members by requiring trustees and managers to make sure that at least one of four conditions is met before a transfer takes place. These conditions include the introduction of an ‘amber’ and ‘red’ flag system which will allow a transfer to either be delayed whilst the member obtains guidance or stopped completely.

The conditions on a statutory transfer will apply where a member has relevant pension benefits so apply to transfers to and from: 

  • public service pension schemes;
  • defined benefit occupational pension schemes; 
  • defined contribution pension schemes; and
  • collective money purchase schemes.

Condition 1: Identify type of receiving scheme – certain types require no additional checks

No additional checks will be required where the receiving scheme is one of the following (and the trustees or scheme managers have confirmed that the scheme has been authorised or set up in accordance with the relevant requirements):

  • public service pension scheme established by The Public Service Pensions Act 2013; or
  • authorised master trust; or
  • authorised collective money purchase scheme; or
  • appropriately authorised and regulated insurer provided personal pension.

Conditions 2 & 3: Transfer to a UK occupational pension scheme (OPS) or a qualifying recognised overseas pension scheme (QROPS)

Transfers to an OPS or a QROPS that are not one of the ‘Condition 1’ type schemes may only occur where:

  • the member has provided the evidence set out under legislation; and
  • the trustees or managers have confirmed, on the basis of this evidence, that the transfer meets certain conditions – for an OPS, that there is an ‘employment link’ and for a QROPS establishing that there is either an ‘employment link’ or a ‘residency link’

(except where the member has evidence of a transfer to the same receiving scheme in the last 12 months). 

Failure to provide such evidence means the member has no statutory right to transfer.

Condition 4: All other transfers – are ‘amber’ or ‘red’ flags present?

Those transfers to which Conditions 1-3 do not apply require trustees and managers to determine if ‘red flags’ or ‘amber flags’ apply. If they do not, the transfer may go ahead. It can also proceed where there are ‘amber flags’ but the member has obtained scams guidance from The Money and Pensions Service (MaPS) or where the member transferred to the same scheme in the last 12 months and on that occasion took MaPS scams guidance and can evidence this.

The introduction of these flags means that trustees and managers will now not only be able to prevent a transfer from taking place where the member does not provide the requested evidence but also where there is an ‘amber flag’ and the member has not taken MaPS scam guidance, or a ‘red flag’ is present.

A standard list of questions has been produced which can be used to obtain the necessary information from the member. These should be tailored to relevant circumstances, be proportionate but may be added to where necessary.

Amber flags
  • high risk or unregulated investments
  • unclear or high charges
  • complicated or unorthodox investment structures
  • overseas investments or overseas adviser
  • high volume of transfers to single receiving scheme or involving single adviser/ firm.
Red flags Reasonable belief that:
  • financial advice provided without appropriate regulatory permissions, or such firm /individual involved in recommendation to transfer
  • unsolicited contact with member
  • offer of incentives e.g. free pension review, early access or cashback
  • pressure to complete transfer quickly
  • failure of member to provide requested information to assess flags.

The consultation closes on 10 June 2021 with a response expected within 12 weeks of the closing date. 

The introduction of this new system will be a welcome addition to the existing armoury which the pensions industry has to help prevent the ‘menace’ of pension scams. Most pension transfers are legitimate and will be able to proceed with little to no additional checks required. However, the regulations should ‘empower’ trustees and scheme managers in the estimated 5% of cases which are a “cause for concern”.

2. Online Safety Bill

The Online Safety Bill announced in the 2021 Queen’s Speech made no reference to online pension scams. However, concerns which have previously been raised regarding exclusion of online fraud were addressed shortly following this; the Government’s statement which accompanied publication of the draft Bill confirmed that the Bill would in fact include user-generated fraud within the ‘regulatory framework’.

3. Pension scams: Regulator speech 

Nicola Parish, Executive Director – Frontline Regulation at the Pensions Regulator (the Regulator) has given a speech to the ABI Savings and Financial Wellbeing Conference on helping protect savers from scams.

In particular, Ms Parish referred to three things which the pensions industry can do to help:

Action 1: Pension Schemes Act 2021

Understand the new provisions in the Pension Schemes Act 2021 and the forthcoming Transfer Regulations on the transfer restrictions. Trustees must also make sure that scheme administrators implement the processes which will be needed to satisfy the new obligations.

Action 2: Sign the scams pledge & report to Action Fraud

As at the time of speaking, 241 schemes and organisations had pledged or self-certified. The Regulator urges others to do so.

Reporting of relevant concerns and suspected scams is one of the six principles of the pledge – the Regulator is asking for the pensions industry to ‘step up’ on reporting and, if a scam is suspected, to report this to Action Fraud.

Action 3: Innovation

It is not just regulators and law enforcement agencies that can be proactive in identifying scams and acting – providers must also take action by making sure that members are ‘aware and alert’.

4. Trial date set for Regulator’s pension fraud case

It has been reported that the trial date for the Regulator’s pension fraud prosecution involving three suspects (including a 61 year-old-man who was extradited from Spain (see our Insight Update)) has been set for next year. It is alleged that during 2012 to 2014, 245 savers were induced to transfer pension amounts totalling £13.7m into 11 pension schemes, controlled by the defendants. One of the suspects has already entered a guilty plea with the remaining two expected to stand trial in June 2022.

Queen’s Speech 2021 – two Bills relating to pensions

Two pensions-related measures were announced in the May 2021 Queen’s Speech:

  • The Public Service Pensions and Judicial Offices Bill: which is intended to bring into effect public service pension scheme changes to “ensure equal treatment for all members” following the unlawful age discrimination finding of the Court of Appeal in the 2018 McCloud case (Lord Chancellor and another v McCloud and others; Secretary of State for the Home Department and others v Sargeant and others [2018] EWCA Civ 2844). The discrimination arose in connection with transitional protection which allowed members near to retirement to stay in legacy schemes which were closed to new joiners and future accrual when career-average schemes were introduced in 2015.
    The Bill will also increase the mandatory retirement age for judicial office holders to age 75; and
  • The Dormant Assets Bill: This will legislate for the expansion of the Dormant Assets Scheme to include assets from the insurance and pensions, investment and wealth management, and securities sectors in the Scheme. This expansion could potentially release more than £800m for social and environmental causes (see our earlier Insight Update).

The absence of wholescale legislative changes will come as a relief for many in the pensions industry given the significant amount of changes that employers and trustees are currently having to deal with following recent legal and regulatory developments.

PPF 7800 Index shows aggregate surplus of DB schemes continues to increase

The latest PPF 7800 Index setting out the latest estimated funding position on a section 179 basis of the eligible 5,318 defined benefit schemes as at the end of April 2021 shows that: 

  • The aggregate surplus increased over the month to £53.7bn from a surplus of £34.2bn at the end of March 2021.
  • The funding ratio increased from 102.0% to 103.1% during this period.
  • The deficit of the schemes in deficit reduced to £135.8bn at the end of April 2021 from £144.3bn at the end of March 2021.

Pensions Dashboards Programme releases further update report

The Pensions Dashboards Programme (the PDP) has announced further details of timings for pensions dashboards in its April 2021 Progress Update Report including:

  • steps and timings over the next six months and beyond to assist data providers in preparing to connect to dashboards;
  • a staging Call for Input to be issued at the end of May 2021 setting out proposals for the staged compulsory connection of pension providers to the dashboard ecosystem; and 
  • continuation of work with the DWP, the Financial Conduct Authority (the FCA) and the Regulator to assist with the creation of secondary legislation which will be needed to put dashboards in place and to create a ‘consumer-focused onboarding’ strategy.

There is still a lot to be done before the commencement of the staged compulsory onboarding in the Spring/ Summer of 2023. This includes consultation on the regulatory framework which the reports says is expected in winter 21/22. 

FCA consultation on new fund category, the Long-Term Asset Fund

The FCA has launched a consultation on its proposals for the Long-Term Asset Fund (the LTAF), a new authorised open-ended fund category for investing in long-term assets such as venture capital, private equity, private debt, real estate and infrastructure.

The aim of the fund is to address the barriers (or perceived barriers) that prevent investors such as defined contribution pension arrangements from investing in long-term illiquid assets by being ‘specifically designed to accommodate’ such assets.

Having an open-ended fund structure such as the LTAF is not the only factor that may be prohibiting productive finance investment and the Productive Finance Working Group (the industry working group set up to facilitate investment in productive finance) is also considering how to resolve other difficulties that may be preventing DC pension default funds from making such investments.

This consultation follows the recently closed DWP consultation on incorporating performance fees within the charge cap, looking at how smoothing these fees could facilitate investment of DC funds in less liquid investment classes (see our Insight Update).

The FCA consultation closes on 25 June 2021.

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