Putting trustees in the ‘driving seat’

As we have been living now for over a year under Orwellian-type restrictions that seem to change from week to week, if not day to day, we should be well used to having conditions set on our ability to do what we once considered normal. At times, we may yearn for something less paternalistic and more laissez-faire. Reflecting further, we may be thankful that others are considering our best interests and taking action to protect us.

And so to the statutory right to a transfer value, or as it might also be known, ‘it’s my money and it’s up to me what to do with it’. In the roaring twenties there is always a ‘new normal’ just around the corner. That ‘new normal’ has the intent of ‘empowering trustees and protecting members’ against the ‘menace’ of pension scams.

The DWP has published draft regulations for consultation[1] which, if passed, would remove the statutory right to a transfer value unless one of four conditions is met (see below). That said, the intent is that the majority of transfers trustees already deem safe will continue with little or no intervention.

The regulations will be made under the Pension Schemes Act 2021 and are expected to come into force in October this year. The conditions will (and have to) apply to all transfers, without exceptions. This includes where the member has chosen to take regulated financial advice or where there is a requirement for the member to take regulated financial advice before their transfer can proceed. DWP expects that the regulations will be supported by guidance issued by The Pensions Regulator (TPR), for occupational schemes. The Financial Conduct Authority (FCA) will provide equivalent support for the personal pension schemes that it regulates.

First condition

Trustees must identify if the transfer is to one of the following types of scheme:

• Public Service Pension Scheme established by The Public Service Pensions Act 2013; or
• Authorised Master Trusts; or
• Authorised Collective Money Purchase Schemes (CMPS), when the appropriate regulations come into force; or
• Personal Pension providers, authorised and regulated by the FCA, that are an insurer authorised by the Prudential Regulatory Authority, or within the same corporate group as such an insurer.

Second and third conditions

Where the transfer is not to a scheme within the First Condition, then the statutory right to transfer can only take place to a UK occupational pension scheme or to a QROPS where the member has provided evidence prescribed in regulations, and trustees have confirmed on the basis of that evidence that the transfer meets certain conditions. This is unless the member provides evidence of a transfer to the same receiving scheme in the last 12 months.

The specific condition for statutory transfers to a UK occupational pension scheme is that the member must demonstrate an ‘employment link’ with the receiving scheme (“the Second Condition”).

A member will have a statutory right to a transfer to a QROPS if they can demonstrate either an ‘employment link’ (under the Second Condition) for transfers to occupational schemes or a ‘residency link’ (‘the Third Condition’). It will be the responsibility of the member seeking to transfer to provide evidence of their employment or residency link.

Where a member is asked to provide specified evidence to demonstrate an employment or residency link and fails to do so, then there is no statutory right to transfer.

Fourth condition

For all other transfers (those to which the First, Second and Third Conditions do not apply), the regulations will require trustees to determine if the circumstances give rise to ‘red flags’ (e.g. member has refused to provide information) or ‘amber flags’ (e.g. receiving scheme is charging unclear or high fees). Where the flags are not present “the Fourth Condition” will be satisfied and the transfer will be able to proceed. It will also be able to proceed where one or more of the ‘amber flags’ are present but the member has taken MaPS scams guidance. Otherwise, the trustees will be able to prevent statutory transfers from proceeding. Helpfully, the consultation includes a list of questions to help trustees determine whether a red or amber flag applies.

Drive safely

According to the consultation “Although these regulations will come with some additional costs, it is important to see them in the context of protection for both the pension saver and the trustee and/or scheme manager. These regulations build on the already existing requirement for trustees and scheme managers to carry out due diligence in relation to a transfer request. In essence, the regulations we intend to introduce will, put simply, be going some way to formalising this process”.

With £millions already lost to pension scams, the industry has been calling on additional powers for trustees to help combat them for some time. These measures should put trustees firmly in the driving seat when it comes to preventing a transfer request and help members navigate safely towards their retirement. Although some refinement of the detail is needed, the draft regulations should be welcomed. Trustees and administrators will need to update processes and member communications for a new regime which could be in force in less than five months’ time.

[1] Pension scams: empowering trustees and protecting members consultation – GOV.UK (www.gov.uk)