The Pensions Regulator and the DWP have issued a joint statement in an attempt to clarify how trustees should be applying the statutory transfer conditions introduced last November. This follows strong criticism about the wording of the legislation and concern about how some of the red and amber flags are being applied, which is leading to some legitimate transfers being delayed or blocked altogether.
The Regulator has also updated its guidance on dealing with transfer requests.
While the latest attempts to clarify the legislation may be welcomed by some, they still leave trustees with the challenge of interpreting and applying the legislation. They also put trustees in the unenviable position of having to decide whether to allow transfers to be made using their discretionary powers where they consider that these are not permitted under the statutory transfer regime.
Background
The statutory transfer conditions were introduced by the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 on 30 November 2021. They are designed to give trustees the power to stop a transfer where there is a risk that a member's pension benefits or savings may be transferred to a scam arrangement.
Under the Regulations, trustees must be satisfied that one of two statutory conditions is satisfied before a statutory transfer can take place. The first condition covers transfers to authorised master trusts, public service pension schemes and collective DC schemes. All other transfers are covered by the second condition, under which trustees are required (amongst other things) to identify whether any of the prescribed red or amber flags are present.
Where a red flag is identified a statutory transfer cannot take place. Where an amber flag is identified the member must receive scams guidance from the Money and Pension Service before the transfer can proceed.
A matter of interpretation
Concerns have been expressed about the wording of the Regulations since they were first published for consultation back in May 2021. Since their introduction, trustees (and scheme administrators) have faced the challenge of deciding how the legislation should be interpreted and applied in practice. Particular difficulties have been encountered in relation to:
- red flag 5, which applies where a member has been "offered an incentive to make a transfer", on the basis that several mainstream providers offer small incentives (such as small cash payments or 'refer a friend' schemes) in connection with transfers into their scheme, and
- amber flag 5(d) which applies where there are "any overseas investments in the receiving scheme".
The joint statement and the updates to the Regulator's guidance are an attempt to overcome some of the unintended consequences of the legislation and, in particular, to clarify the intention behind the flags relating to incentives and overseas investments.
Key messages
Trustees are reminded that they should take a risk-based approach to their decision-making. The joint statement and the updates to the guidance also remind trustees of their ability to grant a non-statutory transfer (where their scheme rules allow), even where a statutory transfer is prohibited by the Regulations, in circumstances where a transfer is considered to be a low risk of being a scam.
In the statement, DWP and the Pensions Regulator also assert that:
- the regulations are not intended to impact on "standard business practices"
- most pension transfers are legitimate and can proceed with minimum intervention
- the legislation should have no impact on the process for transfers that, prior to the introduction of the regulations, would have caused no concern, and
- the vast majority of transfers should cause no concern.
Incentives
In relation to red flag 5 (incentives), the Regulator's guidance now refers to the examples of incentives given in the Regulations and says that "where a particular incentive is not included in [that list], we expect trustees to assess whether the type of incentive offered is one which indicates there is a heightened risk that the transfer might lead to a member being scammed". As the examples included in the definition of "incentive" contained in the Regulations are not exhaustive, trustees are also told that "it is important that you keep up to date with current and evolving scam tactics and consider industry good practice".
Trustees are also specifically reminded that they have the option of making a non-statutory transfer (where the rules allow) where they consider an incentive to reflect "normal industry practice" and there is a low risk that the transfer is a scam.
Comment
While the statement and updated guidance is clearly an attempt to make the Regulations more workable, it leaves trustees in a difficult and unsatisfactory position. Effectively they are being told, where an incentive red flag or overseas investment amber flag applies, to adopt a purposive, risk-based interpretation of the Regulations or to use their power to make a discretionary transfer to overcome the deficiencies in the Regulations. In relation to incentives, it seems that trustees (and administrators) are also now expected to stay up to speed with the current and evolving tactics of scammers, which seems like a tall order indeed.
It is clear that the DWP and the Regulator do not intend the transfer conditions to prevent legitimate transfers. The difficulty is that the Regulations do not distinguish between "legitimate" (or "low risk") transfers and "illegitimate" (or "high risk") transfers. The red and amber flags are bluntly drafted and fail, for example, to carve out circumstances in which incentives that might be considered to be "normal industry practice" are offered or where the presence of overseas investments poses no risk of a receiving scheme being a scam.
Ultimately, the Regulations will need to be amended and the DWP is committed to publishing a review of the Regulations by May 2023. But that is still sometime away and, in the meantime, trustees (and administrators) will have to find a way to make them work as best they can (balancing the risk to members and the need to apply the law as it stands with the desire to enable individual's to exercise their right to transfer their benefits or savings should they choose to). One way of achieving this could be to make use of a discretionary transfer power under their rules (if they have one). Legal advice should be sought before trustees do this. Trustees will also need to consider whether they are comfortable using a discretionary power to allow a transfer that they consider to be prohibited by legislation.
Contacts
If you would like to discuss how the joint statement and the Regulator's latest guidance impacts your approach to implementing the transfer conditions speak with your usual HSF adviser or contact one of our specialists.
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Disclaimer
The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.