When the Occupational and Personal Pension Schemes (Conditions for Transfer) Regulations 2021 came into force on 30 November 2021 the government promised to review them 18 months later. That review shows there's more work to be done.
Back in December 2021 we wrote about the new Occupational and Personal Pension Schemes (Conditions for Transfer) Regulations 2021 (Transfer Regulations), which had come into force on 30 November 2021. They were designed to help combat pension scams, and the government promised to review them after 18 months to ensure they were working effectively to achieve that policy aim. That review has now taken place, and the outcome has been published.
The Transfer Regulations
The Transfer Regulations require trustees to satisfy themselves that one of two pre-transfer conditions are met before paying a statutory transfer (the Pensions Regulator (TPR) has made clear in guidance that it expects the same level of due diligence for non-statutory transfers as well).
The first condition applies only where the receiving scheme is a public service scheme, an authorised master trust or an authorised collective money purchase scheme. In those cases, trustees are required to carry out relatively few checks before making the transfer; they only really have to be satisfied that the receiving scheme does, in fact, fall into one of those three categories.
In all other cases, the second condition applies, and that requires trustees to check for red flags and amber flags. Red flags will prevent a statutory transfer from proceeding, and amber flags, which require the member to seek guidance from the Money and Pensions Service (MaPS). Transfers to occupational pension schemes or qualifying recognised overseas pension schemes are subject to further checks, designed specifically to establish either an employment or residency link, as the case may be.
Since the Transfer Regulations were introduced, trustees have been grappling with two flags in particular, both of which have caused some unnecessary delays in processing transfers:
- Incentives (red flag): this flag is being interpreted differently by different providers, meaning transfers are being blocked either incorrectly or on an inconsistent basis.
- Overseas investments (amber flag): the flag is not clearly defined and currently captures any overseas investments, whether or not they are a cause for concern. As a consequence, it is likely that some members are being referred to MaPS unnecessarily, leading to longer waiting times for safeguarding appointments.
These issues led to the DWP and TPR issuing a joint statement on 5 July 2022 confirming that the Transfer Regulations were not intended to impose additional burdens on schemes or administrators, but acknowledging there were concerns over the way in which they apply where overseas investments or small scale incentives are present.
To address the issue, TPR updated its guidance on dealing with transfer requests. Broadly, the guidance says that some incentives could be considered normal industry practice, and that overseas investments are only of real concern where they exist in an inadequate regulatory environment or in jurisdictions which allow opaque corporate structures. As such, TPR says trustees can, after carrying out appropriate due diligence checks, conclude that there is a low risk of a scam and decide to make a discretionary transfer if their scheme rules allow.
The updated guidance therefore provided a way forward for schemes that were otherwise stuck between the proverbial rock and a hard place. However, as TPR’s view is that a transfer made under those circumstances would be discretionary and not statutory, trustees paying them would not get the benefit of a statutory discharge. This might not always be an ideal position for trustees.
The government’s planned review of the Transfer Regulations was based on a data sharing exercise between the DWP and a mixture of pension schemes, administrators and other industry bodies, over an 18-month period, covering approximately 290,000 completed transfers. However, the parameters of the review were quite restricted.
According to the government there are at least 58 million pensions in the UK, however the review covered just 10 million members from only 11 schemes (which were a mixture of defined benefit, defined contribution and hybrid schemes). The results, the government has acknowledged, are unlikely to be representative of all schemes, particularly smaller ones.
Outcome of the review
The review shows that on aggregate:
- 94% of transfers completed in 2022 were completed under the first condition, or under the second condition with no flags present (though individual scheme experience varied widely, with some schemes reporting that proportion as 99% and others as low as 20%).
- Only 5% of transfers were completed on discretionary basis, though the review does not reveal whether these were paid because the members did not have a statutory right to transfer in the first place, or because the receiving scheme had characteristics which prevented the trustees from paying one.
- Only 1% of transfers paid featured a red or amber flag.
Of the 290,000 transfers covered by the review, 2,400 were given at least one amber flag, with the most commonly awarded (in 57% of cases) being the presence of overseas investments. Overseas investments are very common for pension schemes which routinely invest, for example, in global equity funds. The government knows (and acknowledged last July) that is an issue, and the review suggests what many in the industry have long suspected – that it is causing a backlog of safeguarding appointments at MaPS.
Data collected from MaPS as part of the review shows that between December 2021 and February 2023, there were over 12,600 pension safeguarding appointments. Qualitative feedback revealed concerns about long waiting times for these appointments, which in some cases is exacerbated by members having to attend multiple appointments where they are transferring funds from more than one scheme.
What happens next?
The government has committed to working with the pensions industry and TPR to establish if changes to the Transfer Regulations are needed. To those working with the Transfer Regulations on day-to-day basis, the answer to that question is rather obvious. Many will be hoping for an amendment to them to make the review process more workable sooner rather than later.