Pension scams: Empowering trustees and protecting members
The DWP is consulting on draft regulations intended to deliver on the provisions set out in section 125 of the Pension Schemes Act 2021 in relation to pension transfers to and from both occupational and personal pension schemes. The draft regulations will impose conditions on a member’s right to a statutory cash equivalent transfer value (“CETV”). In future, at least one of four new conditions must be met for the transfer to proceed, the aim being to try to prevent transfers taking place to scam vehicles.
In this response
Whilst we agree with the regulatory objective of striving to achieve a better balance between protecting pension savers and continuing to give savers the right to exercise choice, we would question the DWP’s framing of its objective as “giving trustees and scheme managers greater power to act in their members’ best interests”. This terminology appears to suggest that trustees / managers can act where, in their view, a transfer choice being made is not in the member’s best interests. This is clearly not the case.
The policy intention would be better described as imposing restrictions on CETVs where clear conditions are not met, rather than giving trustees latitude to decide whether or not a transfer should take place.
Current legislation and guidance on transfers
There is already an array of legal requirements and industry guidance governing pensions transfers. Examples here include the appropriate advice requirements where a member’s “safeguarded benefits” (broadly DB) are worth in excess of £30,000, the Pension Scams Industry Group code on combatting pension scams (“the PSIG code”) and the Pensions Administration Standards Association DB transfers guidance.
As such, when dealing with a CETV request, there are any number of steps that scheme administrators (acting on behalf of trustees / managers) need to take. Similarly, there is an abundance of information which members are required to absorb so as to help them make an informed decision.
The draft regulations and proposed supporting guidance by the Pensions Regulator (“TPR”) will add further layers to an already highly regulated area. As a consequence, the proposed supporting guidance could usefully take account of all legal requirements and existing guidance, providing a clear path for trustees / managers (and their scheme administrators) to follow when dealing with transfer requests.
The CETV timeframe
Whilst we understand that further restrictions on CETVs are needed, we note that meeting the new requirements will introduce additional hurdles to a process already littered with necessary obstacles. In our view, the new requirements will almost inevitably result in the transfer process taking longer. Is the Government considering adjusting the overall statutory timeframe for carrying out CETVs in order to accommodate the new requirements?
In particular, the evidential requirements to meet the second and third condition impose new timeframe requirements (ie employment for at least three months or residency for at least six months) which may not sit comfortably with the existing statutory timeframe. This point is considered further below in the responses to questions 2 and 3.
It is conceivable that the new requirements will cause both transfer delays and possible failures to carry out the transfer within the statutory timeframe. This may result in a scheme being disadvantaged financially by having to increase a CETV. The scheme may also receive complaints, resulting in reputational damage. These risks could result in non-statutory transfers under a power in scheme rules (which fall outside of the CETV regime) becoming more attractive.
Possible need for increased legal advice
Another potential practical consequence of enhanced due diligence under the new requirements, and the need to weigh factors when considering the red and amber flags, is that they are likely to give rise to a greater need for legal input on transfers. As well as resulting in additional costs for schemes, this could also increase the burden on trustees / managers / the scheme administrators acting on their behalf. TPR guidance could clearly help here by helping to establish as simple and straightforward a process as possible for schemes to adapt.
Frustrations around transfer requests are often the subject of member complaints to the Pensions Ombudsman. In our experience, the level of information which members are required to assimilate can be a source of disquiet.
To help members and schemes alike, a generic communication would be most welcome, eg setting out the reasons for the new legal requirements, how they fit with existing obligations and industry guidance, and spelling out in simple terms all of the information needed from a member. Such a communication would ease the administrative burden and help to deliver a consistent message across all schemes. This would be particularly helpful where members are transferring out of multiple schemes and therefore witnessing different schemes’ approaches to dealing with transfer requests.
In practice, scheme administrators acting on behalf of the trustees / managers carry out due diligence and process CETVs. As drafted, the requirements are likely to result in trustees / managers having to intervene in many more transfers.
To help reduce the potential burden the new requirements will pose, the evidential obligations set out in the draft regulations could be more specific. In other words, rather than the trustees or managers having discretion to determine whether or not the statutory requirement has been met, the questions could be more binary in places.
Timing of the new requirements
Finally, in our opinion, introducing the regulations in autumn 2021 seems somewhat ambitious given the amount of change that will be required to current administrative processes. Obviously, we would defer here to any views expressed by scheme administrators / trustees / managers, but autumn 2022 would seem a more realistic option.
Q1. Please provide details of any additional types of receiving scheme to which transfers should proceed without additional checks, including how they can be identified for the purposes of the regulations.
We do not think there are additional types of receiving scheme to which transfers should proceed without additional checks. We note that there is still a risk of fraud even if a scheme appears to be one of the types of schemes listed in draft regulation 3(3). A scheme may have been cloned or be using falsified paperwork so trustees or managers of the transferring scheme will still need to carry out due diligence to mitigate this risk. We think it would be helpful to acknowledge this point in any supporting guidance.
Paragraph 32 of the consultation notes that the types of receiving scheme to which transfers should proceed without additional checks “need to be clearly definable, legally, and readily identifiable for the First Condition to be easily operable by trustees and scheme managers”. In addition, TPR guidance should clearly specify exactly what documentation is required to prove a receiving scheme is one of the types of schemes listed in regulation 3(3).
Q2. To what extent is the evidence requirement set out in the regulations to demonstrate an ‘employment link’ sufficient and how could it be strengthened?
As per our comments above, there is still a risk that evidence provided to demonstrate an “employment link” could be falsified. Again, we think it would be helpful to recognise the need for scheme administrators / trustees / managers to be alert to this in any supporting guidance.
There is a timing issue in that the member will have had to have been in employment with the sponsoring employer for a continuous period of at least 3 months ending with the date the request to make the transfer was received by the trustees or managers of the transferring scheme. In practice, it is unclear what trustees or managers of the transferring scheme should do when this timing requirement cannot be met.
It needs to be clear exactly what the trustees or managers of the transferring scheme should be asking for and what documents are acceptable evidence. As currently drafted, the requirements present the trustees with a potentially difficult decision as to whether, “on the balance of probabilities”, the evidence provided by the member demonstrates the employment link.
Q3. How could the evidence requirement for ‘residency link’ work in practice?
As with the evidence requirement to demonstrate an “employment link”, there is a potential timing issue for members which may cause confusion and will need to be carefully spelt out in communications.
The regulations do not prescribe what evidence is needed to demonstrate the residency link. Therefore, it is unclear what trustees or managers should be seeking to prove residency. This lack of clarity could result in unwelcome debate with members as to whether this condition has or has not been satisfied.
There are also practical issues in proving residency, such as the fact that some countries do not require a visa and evidence may be offered by members in a foreign language. Who would bear the translation cost?
As with the employment link, as currently drafted, the trustees / managers will need to decide “on the balance of probabilities” whether the residency link has been met. Guidance on what would or would not be acceptable here would undoubtedly be welcomed.
Q4. How should the ‘red flags’ as set out in the regulations work in practice?
The red flags listed in regulation 8(4) appear clear and reasonable.
However, the definition of “quickly” in regulation 9(2)(e) (an unheard of definition in pensions legislation) adds unnecessary complexity. As drafted, “’quickly’ includes within a time-limited period of one month or less” (our emphasis). This is quite an imprecise definition which could give rise to potential arguments over whether the timeframe was limited or not (and the member therefore placed under undue pressure).
In addition, given that it is only used once, we would suggest removing this definition and redrafting regulation 8(4)(f) so that it reads along the following lines: “the member has been pressured to make the transfer within a period of [one] month or less”.
Q5. How should the ‘amber flags’ as set out in the regulations work in practice?
We have concerns about how some of the amber flags will work in practice, in particular, those set out in draft regulations 8(5)(a)-(c). Scheme administrators alone (and likewise trustees / managers) will not have the expertise to determine whether these amber flags are present. (For context, we note that the FCA has recently commented that not even financial advisers authorised to advise on specific pension transfers take sufficient account of receiving scheme investments.)
Also, whether or not an investment is “high risk” is subjective and not a binary question, which introduces an element of discretion. This also seems contrary to previous guidance around the independent financial advice requirement (ie trustees should not ask to see the advice or second guess the member’s decision). If the member has taken independent financial advice, then there should be an element of personal responsibility. These amber flags therefore seem to shift responsibility for a member’s potential “bad choice” onto the trustees which is onerous and unreasonable.
The amber flags at regulations 8(5)(d) and (e) are less difficult to determine but could still present some challenges. For example, where schemes have a low volume of transfer requests it could be difficult for scheme administrators, particularly in-house administrators, to know whether there is a high volume of requests to a single receiving scheme, or involving a single adviser or firm of advisers, or both.
Q6. Do you have any views on how the requirement to take guidance can work in practice when the pension saver has already taken financial advice?
This duplication could frustrate members. As mentioned in our general comments above, this could be mitigated by TPR providing a generic communication to members making clear what the legal requirements are and why this guidance is required when the pension saver has already taken financial advice.
Q7. Annex 3 sets out the proposed list of standard questions that trustees and schemes managers should use to help determine the presence of red or amber flags. Do these questions provide a comprehensive list, which if any questions are not needed and what other questions should be included?
It is unclear how this proposed list of standard questions fits with other guidance, such as the questions suggested in the PSIG code. It would be helpful to have one comprehensive list of questions which clearly demarcate the “must haves” (ie to the satisfy statutory requirements) from the “best practice” which TPR expects trustees / managers to ask.
Question 5 of the proposed list of standard questions asks whether the term “a free pension review” was used by those who approached the member. This is a common term which is often used by legitimate schemes, so greater clarity would be preferable here.