The Government has published its final proposals for changing the law on transfers to help protect pension scheme members from scams. The new rules come into effect on 30 November, so trustees and administrators must act quickly.
In spring, as set out in our earlier Law-Now, the Government set out proposals to use new powers under the Pension Schemes Act 2021 to allow certain low risk transfers to continue on the current basis, but otherwise to introduce a new system based on trustee consideration of specified risk factors, signified by red and amber flags.
Under the original proposals, transferring scheme trustees would have to be satisfied that one of four statutory ‘Conditions’ was met. In broad terms, these were (i) the transfer was to a prescribed type of low-risk scheme; (ii) the member demonstrated an employment link to the receiving scheme; (iii) a member transferring to a qualifying recognised overseas pension scheme (QROPS) evidenced a residency link; or (iv) the trustees assessing that none of the prescribed red or amber flags were engaged. Where an amber flag was raised, a transfer could not be made until the member took appropriate guidance. If a red flag was raised, the trustees would not be able to make the transfer at all.
In a detailed response to consultation, originally expected earlier in the year, DWP has carried forward the essence of the policy behind its original proposals. However, it has made two key structural changes.
Firstly, it has removed FCA-regulated schemes operated by an insurer from the list of ‘safe’ schemes within the first Condition. There will now only be an automatic statutory transfer right to public sector schemes, authorised master trusts and authorised collective defined contribution schemes. DWP says that this will level the playing field for FCA-authorised receiving schemes.
Secondly, DWP has decided to merge the previous second, third and fourth Conditions (the employment link, residency link and red and amber flags tests) into a new ‘holistic’ Second Condition, covering all occupational and personal pension schemes which do not fall within the First Condition. Whilst this Second Condition is now a single test, the main requirements under the original three conditions are all still present and so this simplification in the legislation may be unlikely to result in much simplification in the process for pension schemes themselves.
The Government has made some drafting changes to the requirements under this Second Condition, including changes designed to clarify the application of the red and amber flags. Helpfully, DWP expressly says that where trustees believe no flags are likely to be present, they have no obligation to seek further information and can process the transfer without additional activity. The Government says that this may include using “white lists”, of receiving schemes which have been identified as low scam risk.
The Pensions Regulator has also issued guidance to support the changes, including a checklist of the information which trustees should require from members, and examples of what trustees should consider when assessing the red and amber flags.
The new rules and Conditions will apply where the transfer process is initiated on or after 30 November 2021, either by the request for a statutory transfer quote (for DB benefits), or the member’s request to make a transfer (in other cases).
Trustees can find themselves in a difficult position in circumstances where they suspect a pension scam, but have a legal duty to make the transfer anyway. The new statutory transfer regime goes some way to resolving this problem, which is welcome. However, the new rules will inevitably introduce additional uncertainty into the trustees’ due diligence and decision-making process on transfers. This is compounded by the fact that schemes only have a few short weeks to implement relevant changes to their scheme communications and practices: now that we have the final word from Government, there is no time to lose. Some schemes may decide that it is necessary to suspend transfers for a period (within the time limits permitted in the legislation) whilst they change and test their new practices.
The consultation response can be found here and the final Regulations can be found here.
For further information, please speak to your usual contact at CMS.