Changes to the conditions for transfers-out on and from 30 November 2021: protecting members from scams

On and from 30 November 2021, new conditions will need to be satisfied before members will have a statutory right to have a cash equivalent transfer value (CETV) paid out from a pension scheme.

The new conditions will allow transfers to certain types of “safe” schemes to proceed with no additional checks. However, trustees and scheme managers will, for the first time, be empowered to prevent or pause a transfer request to other types of schemes if they see warning signs of possible scams.

The Government set out the conditions on 8 November 2021 as part of its response to its May 2021 consultation on empowering trustees and protecting members from pension scams (see our earlier speedbrief on the details of the consultation). The new conditions are set out in the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (the “Regulations”), and differ from the original consultation proposals in some key respects. The Pensions Regulator has also issued guidance to assist schemes in applying the new requirements.

Trustees and scheme administrators will need to act quickly to ensure their processes are updated in time to go live on 30 November 2021.

Timing?

The new conditions will apply to all requests for a statement of entitlement (for defined benefits) and to all requests for a transfer payment (for money purchase benefits) which are received on or after 30 November 2021.

This is clearly quite tight timing, and trustees and administrators will need to act quickly to update their processes and systems for an end of November “go live” date.

Helpfully, the new laws confirm that transfer-out requests that are already in progress as at 30 November will not be caught, but there are no other transitional provisions to allow schemes to phase in any changes to processes.

What are the new conditions?

All statutory transfers will need to satisfy either the First Condition or the Second Condition and if neither condition is satisfied, the member loses their right to the transfer in respect of that request.

The First Condition: this is met if the member is transferring to a public service pension scheme, an authorised Master Trust scheme, or an authorised collective money purchase scheme.

If the First Condition is met, the transferring member has a guaranteed right to transfer. Trustees and scheme managers need to confirm the scheme type of the receiving scheme. Trustees or scheme managers must not request further evidence or information from the member for this purpose, other than that necessary to identify the correct receiving scheme. However, it is worth noting that this does not prohibit the transferring scheme from requesting any evidence needed to satisfy existing requirements of the CETV regime, such as confirmation that the receiving scheme is willing to accept the transfer, or that appropriate independent financial advice has been taken where this is legally required.

The Second Condition: this applies to transfers to all types of schemes other than the “safe” schemes covered by the First Condition.

The Second Condition sets out scam risk indicators in the form of red and amber flags (summarised below).

Where the trustees or scheme managers of the transferring scheme conclude that any red flag is present, it will prevent the transfer from proceeding altogether. If they decide that any amber flag is present, the transfer can only proceed if the member provides specific evidence that they have taken scam-specific guidance from MoneyHelper (the guidance service provided by the Money and Pensions Service). That evidence will be in the form of a unique identifier provided by MaPS to the member once the guidance session has taken place.

In some circumstances, trustees and scheme managers are required to request certain information from members to help them to identify whether any red or amber flags are present. This requirement is triggered where the transfer is to an occupational pension scheme (when evidence of an employment link must be requested), or where the transfer is to a qualifying recognised overseas pension scheme (QROPS) (where evidence of overseas residency in the relevant jurisdiction must be requested). In any other case, the transferring scheme can opt to ask the member or the receiving scheme for additional evidence or information, but is not obliged to do so.

Where any evidence or information is requested from the member under the Regulations, that information must be provided to the transferring scheme trustees or managers directly by the member, even where a representative is acting for the member on the transfer (subject to very limited exceptions related to lack of mental capacity).

It is worth noting that the new conditions differ in a number of respects from the draft regulations the Government consulted on. In particular:

• insurers and FCA-authorised entities were included in the First Condition (safe schemes) in the draft regulations, but have now been excluded.

• in the draft regulations there were four mutually-exclusive conditions, but following consultation the draft conditions 2, 3 and 4 have been merged into what is now the Second Condition.

What are the red and amber flags?

As might be expected, the red flags are those circumstances where the suspicion of a scam will be strongest:

• the member fails to provide a substantive response to a request for evidence or information made in respect of the Second Condition in accordance with the Regulations (a “Second Condition Request”)

• the member fails to provide evidence that they took guidance from MoneyHelper after being required to do so because one or more amber flags were present

• an unregulated person has carried out a regulated activity for the member in respect of the transfer

• the member’s request to make the transfer has been made following unsolicited contact for the purpose of direct marketing of the transfer – ie. pensions “cold-calling” has taken place

• the member has been offered an incentive to make the transfer

• the member has been (or has felt) pressured to make the transfer

Conversely, the amber flags are circumstances where there are some concerns, but where the position is less clear-cut than in the red-flag scenarios:

• the member provides an incomplete response to a Second Condition Request

• the trustees or scheme managers consider that some or all of the evidence provided in response to a Second Condition Request may not be genuine or may not have been provided directly by the member

• the evidence the member provided in response to a Second Condition Request does not demonstrate there is an “employment link” or “residency link” as required by the Regulations

• the receiving scheme includes high risk or unregulated investments

• the receiving scheme is charging unclear or high fees

• the structure of investments included in the receiving scheme is unclear, complex or unorthodox

• the receiving scheme includes overseas investments

• there has been a sharp or unusual rise in the volume of requests to make a transfer from the transferring scheme, either to the same receiving scheme, or involving the same adviser or firm of advisers (or both)

In either case, it is up to the trustees or scheme managers of the transferring scheme to decide whether the red or amber flag is present, applying the relevant standard of proof (see below). If they decide that it is, that determines the question for the purposes of the Regulations, though they can re-take the decision if they subsequently conclude that the original decision was wrong, or if the member belatedly provides additional evidence or information.

How does the transferring scheme reach a decision?

The Regulations set out, in some detail, the standard of proof which must be satisfied. This varies both as between the First and Second Conditions and also as between the different flags, with a range running from “beyond reasonable doubt”, through “balance of probabilities”, to simply having “reason to believe” that some of the amber flags are present. It will be important for transferring scheme trustees and managers to be clear what standard of proof applies in each case and to understand how their administrators will apply these.

When reaching the decision on whether the conditions are satisfied, in a case where the trustees and scheme managers are not required to seek additional information from the member (and do not decide to do so voluntarily), they can proceed to decide whether any of the flags are present based on all relevant information which is available to them. This can include:

• any information provided informally, whether by the member or another party to the transfer (for example, information mentioned in a phone call to the scheme administrator)

• any evidence or information already held by the trustees or managers, including evidence or information obtained in the course of carrying out their duties in relation to the transferring scheme or another scheme (for example, information gained from due diligence on a previous transfer request, or which a professional trustee has learned from investigations carried out by another scheme)

In a case where the transferring scheme trustees or managers do seek additional information from the member, they are also expressly permitted to take into account the fact that there has been an omission (whether general or specific) of evidence or information from the member’s formal response to that request.

Once they have reached a decision, there are prescribed time limits for notifications to be made to members under the Regulations, some of which are very tight indeed. In particular, if a decision is reached that the conditions are not met, and that therefore the member has lost the statutory right to take a CETV, notification must be sent to the member within 7 working days.

The Regulator’s guidance

The Pensions Regulator has published guidance on the new conditions. This:

• includes a list of the minimum information that trustees should obtain from members looking to transfer

• covers the checks trustees will need to make to comply with the new conditions

• gives examples of when red or amber flags may be present

• discusses how trustees will be expected to communicate with members about their transfer requests

One helpful point to note in particular is the confirmation that schemes may validly operate “clean lists” of low-risk personal pension schemes, where no further due diligence will be required (though the assessment of the scheme as low-risk should be checked periodically).

The guidance notes that schemes may allow for non-statutory transfers but recommends that trustees consider the checks used for statutory transfers when assessing whether to grant a non-statutory transfer. It also directs trustees to be aware of member vulnerability when carrying out their due diligence, and refers to guidance from the Pension Scams Industry Group Code of Good Practice and from the FCA on how to identify vulnerability and treat vulnerable members fairly.

At the end of the guidance, there is a transfer process decision tree, which trustees and administrators may find it useful to refer to when familiarising themselves with the new requirements.

Comment

The DWP has clearly listened to concerns raised by the industry regarding potential unintended consequences of the original proposals, and many of those have been met in the final version of the Regulations. Transferring schemes are also likely to welcome the new ability to protect members more directly against transfers to what are clearly highly suspicious vehicles.

However, given the extent of the changes from the consultation draft, there is a lot here for trustees and scheme managers to get to grips with, and not much time in which to do so.

In particular, new template communications – for example the one month notification to any member requesting a transfer that their application will be assessed against the two conditions – will need to be prepared in short order. Similarly, it may be necessary to consider how the new decision-making which is required will be managed in practice: for instance, whether trustees will need to delegate the assessment of evidence in some way to enable speedier decision-making outside the pattern of scheduled trustee meetings.