Pension liberation: new restriction on transfer rights

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Following on from the Autumn Statementconsultation, the DWP and HM Treasury have issued looking at three aspects of pension liberation scams. The consultation covers:

• limiting the right to statutory transfers;

• making it harder to establish fraudulent schemes; and

• a ban on cold calling.

Limiting the right to statutory transfers

A key issue for trustees is the tension between a member’s statutory right to transfer and their obligation to ensure the transfer is made to a legitimate pension arrangement. The recent case of Hughes has loaded the dice in favour of the liberators, making it harder for trustees to refuse to make a transfer.

The proposal in the consultation document is that the statutory right to transfer will in future only apply where:

• the receiving scheme is a personal pension scheme operated by an FCA authorised firm or entity;

• a genuine employment link to the receiving occupational pension scheme can be demonstrated; or

• the receiving occupational pension scheme is an authorised master trust.

A key issue here, if the proposal is implemented, is where the onus of proof would lie in relation to the genuine employment link. It would seem right from a trustee point of view that the onus should be on the member to provide proof of earnings and that no statutory obligation to transfer would arise until the member produces satisfactory evidence.

Another option proposed is to enable “insistent” members to sign an express discharge confirming they have received warnings about the risks and limiting any right of recourse to the transferring scheme. This could either be instead of or as well as the proposed new restriction on statutory transfers. If the discharge route were to be adopted trustees would still be required to undertake due diligence (i.e. they could not just send out a discharge form on receipt of a transfer request). The discharge would be coupled with a statutory cooling-off period to allow the member time to change their mind.

These changes will require primary legislation – no suggested timetable is mentioned in the consultation.

One point to note is that the proposal does not affect express scheme transfer rules, nor does it refer to the recognised transfer rules in the Finance Act 2004. As things stand, any provisions in scheme rules giving members a right to transfer which go beyond the proposed new statutory restrictions are likely to remain. Trustees (and employers) may need to consider the extent to which any express rules can be amended to bring them in line.

Scheme establishment

A common platform for pension liberation scams is the establishment of a new small occupational pension scheme with a shell employer. The consultation document includes a proposal that HMRC will in future only register an occupational pension scheme which has been established by an active company. The consultation also asks what other restrictions might be put on the establishment of small schemes in order to limit pension scams.

Cold-calling ban

The proposal is that legislation will be introduced to ban all cold calls in relation to pensions. This will be enforced by the Information Commissioner’s Office with fines of up to £500,000.

Included in the scope of the proposed ban are:

• offers of a free pension review, or other free financial advice or guidance;

• assessments of the performance of the individual’s current pension funds;

• inducements to hold certain investments within a pensions tax wrapper including overseas investments;

• promotions of retirement income products such as drawdown and annuity products;

• inducements to release pension funds early;

• inducements to release funds from a pension and transfer them into a bank account;

• inducements to transfer a pension fund;

• introductions to a firm dealing in pensions investments; and

• offers to assess charges on the pension.

The ban cannot apply to firms making calls from overseas.

The ban is not intended to apply to legitimate interactions where the customer has expressly requested information or there is an existing relationship. This would include:

• an individual’s current pension provider;

• pension providers holding funds from an individual’s previous employments; and

• a financial adviser the individual has previously had appointments with.

Calls could still be made where an individual has made an express request – for example by responding to an advert or emailing a financial adviser. However, the plan is to ban calls to people who have inadvertently opted in to receive third party communications. Failing to opt out will not be considered to be an express request to receive information.

The current proposal only relates to phone calls but the consultation does ask whether it should be extended to all electronic communications.