Trustees should liaise with their administrators to check how their transfer systems have been modified to accommodate the new statutory requirements.  In particular, trustees should consider requesting information on how the administrators assess the more subjective elements of the new conditions, such as what would constitute a "high risk" or "unorthodox" investment in a receiving scheme and what overseas investments in the receiving scheme may trigger an amber flag warning. In our recent experience, these are the areas that are more likely to lead to transfer requests being referred to trustees from administrators and so may lead to additional member queries or challenge. Trustees should also carefully document their own decision-making in this area.

Background

In the Pension Schemes Act 2021 (PSA21), the Government modified the statutory transfer legislation (often referred to as the Cash Equivalent Transfer Value (or CETV) legislation) to enable trustees to reject transfer requests where certain conditions are not met. 

The relevant provisions in the PSA21 come into force on 30 November 2021, and are supplemented by the detailed regulations which contain the relevant transfer conditions, the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 ("Regulations"), which also came into force on 30 November.

The Government originally consulted on an earlier draft of the Regulations in May 2021 and published a response to the consultation at the same time as laying the final version of the Regulations.  In the response, the Government set out why and how it had altered the relevant transfer conditions from the original proposed draft and referred frequently to its expectation that the new rules should only lead to additional work for trustees (i.e. beyond their current due diligence) in respect of a "minority of transfers".  The Department for Work and Pensions has committed to reviewing the Regulations within 18 months of them coming into force to ensure they remain effective in targeting evolving scam methods.

What are the new measures that were introduced from 30 November?

The final Regulations refer to only two conditions and trustees have to ensure that one of the two conditions is met for transfers to proceed. The earlier version of the Regulations contained four conditions, but two of these have now been incorporated into the two remaining current conditions.  The final conditions contained in the Regulations are as follows:

The First Condition - If the transfer is to a public service pension scheme, an authorised Master Trust scheme or an authorised collective money purchase scheme, then trustees can confirm that the First Condition is satisfied and no further due diligence is required and the transfer can proceed.

Note that the Government has decided to remove the original inclusion on this permitted list of schemes provided by FCA registered insurers.  This was done to "level the playing field" for all FCA registered and authorised schemes, and transfers to those schemes will all have to proceed under the Second Condition.

The Second Condition - This condition applies to all other transfers.  Under this Condition, there are two relevant types of transfer:

• Type 1 are those transfers not being made to another occupational pension scheme or a QROPS (i.e. to a contract-based scheme such as a personal pension plan) and it can be met where trustees have carried out sufficient checks to ensure that the "red flags" and "amber flags" are unlikely to be present (estimated by the Pension Scams Industry Group to apply to about 95% of current transfers).
• Type 2 are those transfers which are either:
  • to an occupational pension scheme (where trustee due diligence must be carried out to show that the "employment link" applies) or to a QROPS (where due diligence must show that the "residency link" applies); or
  • those transfers where trustees choose to carry out due diligence due to concerns that one of the "red flags" or "amber flags" might be present. 

It is only in respect of Type 2 transfers that the Government expects trustees to have to carry out additional due diligence beyond their current checks and further action might be needed.  For Type 1 transfers, trustees may legitimately decide, based on their existing knowledge and information from their other due diligence checks, to say that on the balance of probabilities, the red and amber flags are not present and no further checks are required.

Where a Type 2 transfer arises and the transfer is to an occupational scheme, trustees must seek evidence to check the "employment link" is met; where the transfer is to a QROPS, the "residency link" must be checked.  Alternatively, the trustees may have to exercise their discretion to seek further evidence or information about the presence of the red or amber flags because they cannot say, on the basis of current due diligence, on the balance of probabilities, that the red and amber flags are not present.  If they decide that they have no reason to believe the flags are not present, the transfer can proceed.  If, on the other hand, they have reason to believe that a red flag is present, the transfer cannot proceed.  If an amber flag is present, the member must evidence that it has taken guidance from MaPS (through the "MoneyHelper" service).  If the member can then prove that the guidance has been taken, the transfer can proceed.  If the evidence is not provided, the transfer cannot proceed. 

What is a "red flag"?

A red flag will be present where:

• a member has failed to provide a substantive response to a request for evidence or information in relation to proving the "employment link" or the "residency link" or has failed to provide evidence that they have taken guidance from MaPS; or
• broadly, an unauthorised person has acted in relation to the proposed transfer; or
• the member's request to transfer was made further to an unsolicited contact or direct marketing offer; or
• the member has been offered an incentive to make the transfer; or
• the member has been, or considers that they have felt, pressured to make the transfer.

What is an "amber flag"?

An amber flag will be present where:

• the member has provided an incomplete response to a request for evidence on the "employment link" and the "residency link", or the evidence is insufficient to prove either link or the trustees decide that the evidence may not be genuine or may not have come from the member; or
• there are any "high risk" or "unregulated investments" in the receiving scheme; there are any unclear or high fees being charged by the receiving scheme; the structure of the investments is "unclear, complex of unorthodox"; there are any overseas investments included in the receiving scheme or there has been a "sharp or unusual rise" in the volume of transfer requests either to the same scheme or involving the same adviser.

In practice, as the Government has included insufficient evidence being provided to establish the "employment link" or the "residency link" as amber flags, as opposed to red flags, transfers falling into this category can now still go ahead, but only after MaPS guidance has been taken and evidenced.

What are the "employment link" and the "residency link"?

The "employment link", which applies where a transfer is to be made into another occupational scheme, requires evidencing several things, including that the member's employer is the sponsoring employer of the receiving scheme, that the relevant employment has lasted for 3 months, a minimum salary requirement has been met (broadly the earnings were above the statutory "lower earnings limit") and that contributions have been made by the sponsoring employer into the receiving scheme (and, if relevant, the member).

The regulations set out further detail of exactly what evidence should be provided in this area.

The "residency link", which applies where a transfer is to be made into a QROPS, requires evidence of the member's formal residency documentation in the relevant country and at least two other items of evidence showing that the member is resident in that country.

Further Pensions Regulator guidance

At the same time as the Government published the consultation response and the final version of the Regulations, the Regulator also issued guidance called "Dealing with transfer requests".  The guidance covers various areas, including:

• information on what communications should be made with members requesting transfers and when;
• how to approach non-statutory transfers (which are not covered by the Regulations);
• what personal and financial information should be collected from transferring members;
• the information that should be checked to decide whether the First Condition is satisfied and what information should be provided to check that the employment link or the residency link can be demonstrated;
• further guidance on how to determine if a red or amber flag is present.  For example, in the case of the red flag involving a member feeling pressured to transfer, the Regulator refers to a scenario where a courier has waited for forms to be signed as a potential indicator of an issue.  For amber flags, the guidance tries to give concrete examples to provide context to the subjective tests set out in the legislation.  For example, in the context of overseas investments, the Regulator refers to the principal concern being investments in a lax, or non-existent, regulatory environment (and not where the investment is in a global equity fund).

As noted above, it is anticipated that, in the majority of cases, trustees do not need to carry out additional due diligence as a result of the new requirements.  In its guidance, the Regulator suggests schemes keeping records of "low-risk" personal pension schemes, often referred to as a "clean list", where previous due diligence has shown no issues with the receiving vehicle.  This will enable transfers to be processed quickly and without further checks where subsequent transfers are to be made into one of the clean list arrangements.  The guidance also contains a helpful "transfer process decision tree" at Appendix 1.

Key takeaways and action points

Whilst the introduction of specific powers for trustees to prevent scams is welcome, trustees and their administrators are now very much at the frontline in terms of deciding which transfers can proceed without further checks and guidance and which transfers are potential scams and should be halted, and evidence-gathering accordingly.  If the processes are not carried out properly, trustees could well be criticised or challenged.  Despite helpful examples being provided by the Regulator in its guidance, many of the tests in the legislation, particularly in the context of amber flags, remain quite subjective and will require further consideration by trustees (and potential delays to transfers where MaPS guidance has to be taken).

We would recommend that trustees promptly speak to their administrators about the additional due diligence checks and processes required by the Regulations and Regulator guidance. In particular, trustees should consider asking their administrators how they are assessing the more subjective elements of the statutory tests, for example, what would constitute a "high risk" or "unclear, complex or unorthodox" investments in a receiving scheme and what approach is being taken in relation to overseas investments.  In our experience, these are the areas that are most likely to cause issues for trustees in practice.