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Pension transfers – new conditions to combat scams

  • United Kingdom
  • Pensions


The Department for Work and Pensions has recently published a consultation on draft regulations designed to combat pension scams.  This is a topic high on MPs’ list of concerns in the pensions field, as evidenced by the content of parliamentary debates during the passage of the Pension Schemes Act 2021, under which these new regulations will be made, and also the short consultation period, which runs only until 9 June.

The proposed regulations will impose additional conditions which must be met before a member will have a statutory right to transfer accrued pension rights to another scheme.  At first sight this appears to mean yet more work for transferring schemes when processing transfer requests. Nevertheless, it is likely that the new regulations will be welcomed by the industry, where many are frustrated that trustees and managers have no legal right to withhold transfers even where there are serious concerns that the receiving scheme is a vehicle for a pensions scam.

The new pension transfer conditions – an overview

In line with previously announced policy on combatting scams, the government is taking an approach which divides receiving schemes into two main categories, based on levels of risk.  For schemes categorised as low risk, no additional investigations will be necessary; but for all other schemes, extra checks on the validity of the receiving scheme will be required.

To achieve this, the consultation paper sets out four new conditions, at least one of which must be met before a member will be entitled to a statutory right to take a cash equivalent transfer value (CETV):

  • First Condition: the trustees / managers of the transferring scheme have confirmed that the transfer is to a specified type of (low risk) scheme
  • Second Condition: the transfer is into an occupational pension scheme (either in the UK or overseas) and the member has provided specific forms of evidence to demonstrate that there is a genuine employment link between the member and the scheme
  • Third Condition: the transfer is into a scheme which is a qualifying recognised overseas pension scheme (QROPS) and the member has provided specific forms of evidence to demonstrate that the member has a residency link with the financial jurisdiction in which the QROPS is established
  • Fourth Condition: there are no “red flag” circumstances in respect of the transfer, and if there are any “amber flag” circumstances, the trustees / managers have received evidence that the member has taken specific guidance on pension scam risks from the Money and Pensions Service

It is important to note that these new conditions apply in addition to, rather than in place of, all existing statutory conditions which must be met before a member has a CETV right.  However, the new conditions will not be mandatory on a non-statutory transfer, since the draft regulations do not override scheme rules.

First Condition (low risk schemes) – the details

The draft regulations list four categories of schemes where trustees and managers can safely assume that a transfer will not result in the member being scammed.  These are:

  • public service pension schemes
  • authorised master trust schemes
  • authorised collective money purchase schemes (once the statutory authorisation regime for these comes into force)
  • pension schemes operated by an insurer which is FCA-authorised and regulated and is PRA-authorised (or by entities within the same corporate group as such an insurer)

The transferring scheme trustees / managers will need to confirm that the receiving scheme is one of these types of schemes, and must notify the member that they have done so. The member cannot be required to provide any evidence to assist in the confirmation process.

Second Condition (employment link) – the details

Since single-member occupational pension schemes with a shelf-company employer are the commonest form of scam vehicles, the Second Condition is clearly intended to be a key obstacle to pension scammers.  The member will need to demonstrate (with the specified evidence) four facts, as follows:

What needs to be shown?

What evidence is required?

Member’s employer is a sponsoring employer of the receiving scheme

Letter from employer confirming participation in scheme

Member is and has been for last 3 months in employment with the employer

Letter from employer confirming continuous employment, including start date

Member’s earnings from the employment within last 3 months have been at or above the lower earnings limit for NI purposes

Payslips or similar pay remittances plus bank or building society statements or passbook showing salary deposits

Member and employer have both contributed to the scheme within last 3 months

Schedule of contributions or payment schedule showing employer and employee contributions separately

The transferring trustees / managers will be entitled to insist on sight of original documents, not merely copies.  Since the lower earnings limit is currently set at £120 per week (£520 per month), this is a non-trivial amount of upfront funding for a scammer to find in order to try to meet the condition.  Employer pension contributions will in theory need to be paid on top, but there is no requirement to demonstrate that money has actually been paid across in accordance with the schedule of contributions / payment schedule – possibly a loophole?

Where a member has multiple pots which they wish to consolidate into a single scheme, it will not always be necessary to produce fresh evidence on each transfer: if the member has made a transfer to the same scheme within the previous 12 months, it is assumed that the previous transferring scheme has investigated the validity of the receiving scheme and was satisfied.  In such a case, the member can satisfy the Second Condition by providing evidence in writing showing that a previous transfer has gone through within that time period.

Third Condition (residency link for QROPS) – the details

The special treatment for QROPS no doubt stems from the fact that a transfer to a QROPS may be a legitimate part of a member’s plans to move abroad, and that there may validly be no employment link between the member and the QROPS, even if the QROPS is an occupational pension scheme.  In this case, the evidence must show that the member is currently resident in the same financial jurisdiction as that in which the QROPS is established, and has been continuously resident there for at least 6 months prior to the date the transfer request is received (ignoring any temporary absences which add up to no more than 30 days in aggregate).

The draft regulations are less prescriptive here: the transferring trustees / managers must see the member’s formal residency documentation, but have discretion to request any other evidence in the member’s possession which confirms the member’s current residency and its duration.  Again, the transferring scheme can insist on seeing original documents, and evidence of a previous transfer to the same scheme within the last 12 months is a valid alternative.  The question as to whether the residency link is established is stated to be one for the transferring trustees / managers to decide on the balance of probabilities.

Fourth Condition (red and amber flags) – the details

A proposed transfer which has failed to meet any of the other three conditions will not automatically be a scam: for example, a member may have moved to a part-time employment with earnings below the lower earnings limit, or may want to move their pension overseas in advance of plans to retire abroad in the near future.  This is where the Fourth Condition comes in.

For the Fourth Condition to be met, it must be the case that:

  • no “red flag” circumstances apply; and
  • either no “amber flag” circumstances apply, or if they do, the member has taken specific guidance from the Money and Pensions Service (MaPS) on pension scams risks and has provided the transferring scheme with specific evidence to this effect

The draft regulations have an exhaustive list of red and amber flags:

Red flags

Amber flags

  • member has failed or refused to provide information to the transferring scheme about the transfer
  • an amber flag is present and the member has not provided evidence from MaPS that the member has taken MaPS guidance on pension scams
  • provision of financial advice on the transfer from an adviser without the necessary FCA regulatory permissions
  • transfer request was prompted by cold-calling
  • member has been offered an incentive to transfer
  • member has been pressured to make the transfer quickly
  • receiving scheme includes high-risk or unregulated investments
  • receiving scheme is charging unclear or high fees
  • receiving scheme’s investment structures are unclear, complex or unorthodox
  • receiving scheme includes overseas investments or an overseas adviser has advised the member on such investments
  • transferring scheme is aware of a high volume of requests to a single receiving scheme
  • transferring scheme is aware of a high volume of requests involving a particular adviser / advisory firm

Whilst the draft regulations provide some further detail on certain of these flags – for instance, what is meant by “high fees”, “high risk” investments or a “high volume” of transfer requests – the ultimate test of whether a flag is present will be whether the transferring trustees / managers have a reasonable belief that any of the above circumstances is present, based on their knowledge of the financial market, the information provided by the member, and information on volumes of transfers from their own scheme.

Given the first red flag in the list, it will in effect be a condition of transfer for the member to provide any information requested by the trustees / managers to assess whether the Fourth Condition is met, and Annex 3 of the consultation document sets out a list of suggested standard questions to be used.

Information for members on the new pension transfer conditions

The new conditions will (in most cases) require the member to provide substantial further information in support of their transfer request.  Because of this, the DWP is also proposing that the transferring trustees / managers must provide information to the member on the conditions within one month of the member’s request for a CETV statement or for a transfer payment (whichever comes first).  It would be helpful if this requirement could be dispensed with in cases where the First Condition is clearly satisfied (given that no additional evidence will be required from the member in such cases), and it may be that this point is tweaked in the final regulations following consultation.

The new pension transfer conditions – our views

With £1.8m lost to pension scams in the first quarter of 2021 alone, these new powers enabling transferring schemes to prevent transfers to highly suspect pension vehicles are to be welcomed.  Some elements of the draft regulations are perhaps a little too rigid – for instance, as currently drafted, the Second Condition would not appear to be satisfied in any case where the receiving scheme is operated on a salary sacrifice basis, because the schedule of contributions or payment schedule would not contain entries for member contributions.  But these are in the main small niggles, and will hopefully be raised and resolved during the current consultation.

Once the regulations are in final form, occupational and personal pension providers will need as a matter of urgency to update their processes and member communications ready for the new regime, since it is anticipated that these requirements will be brought into force later this year. It will also be important to assess at the outset of each transfer whether or not the request is for a statutory transfer. Non-statutory transfers are not covered by these new regulations, so providers will therefore need to determine whether it is appropriate to adopt a similar approach when handling requests for such transfers, or whether to continue with their existing processes.