Transfer conditions: Updated guidance on risk-based approach for trustees

United Kingdom

Following concerns raised both directly and in the press, the DWP and TPR have issued a joint statement (and TPR has amended its guidance) on the application of the transfer conditions regulations which came into force in November 2021.

The main theme of the statement is that the regulations are not intended to impose additional burdens on schemes or affect standard business practices and “should have no impact on the process for transfers that, prior to the introduction of the regulations, would have caused no concerns”. It suggests that where trustees have no cause for concern about a scam then they should proceed with the transfer, using any discretionary powers in scheme rules to make a non-statutory transfer where the regulations indicate that the statutory right has been lost.   

The problem areas

To recap, a statutory transfer cannot take place where the trustees consider that a “red flag” is present. Where an “amber flag” is identified, the trustees must direct the member to mandatory guidance from MoneyHelper. More details can be found in this Law-Now.

Difficulties have arisen in practice in two main areas. The first is the red flag that applies where the member has been offered an “incentive” to make the transfer. Incentives are not clearly defined in the regulations and trustees have rightly been cautious of processing a transfer where any “sweetener”, however modest, has been in play. TPR is now saying that some incentives “could be considered normal industry practices” in which case, after carrying out due diligence trustees may consider there to be low risk of a scam and, where rules allow, grant a discretionary transfer.

The second problem area is overseas investments. On the face of it, the amber flag catches any overseas investment in the receiving scheme, not just those which might appear risky or attract high charges and regardless of whether the member actually intends to invest their transfer in an overseas investment. TPR guidance has now been changed to say that: “After carrying out due diligence you may consider the transfer is at a low risk of a scam and, where your scheme rules allow, you may consider granting a discretionary transfer”.

CMS comment

It is not clear how much this statement will help trustees in those situations where there is a tension between the restrictive wording in the regulations, and the desire to facilitate a transfer which they reasonably consider low-risk. It appears that TPR has chosen to push decisions back on transferring trustees, by encouraging use of the discretionary transfer option even where the red or amber flags are engaged. Its amended guidance now expressly says that “the regulations do not prevent you from making a non-statutory transfer payment where you consider that the transfer is in the member’s interests and does not pose a risk”.

The starting point for trustees must still be the regulations. Where appropriate due diligence has been undertaken and one of the flags is present then trustees could, in line with the new guidance, take a risk-based decision to proceed with the transfer if scheme rules allow. This would mean bringing the transfer entirely outside the statutory regime and prevent the trustees from being able to rely on a statutory discharge.  In practice that may not be a problem for trustees, but would need careful thought before being adopted as a practice.