Pension transfers: what’s changing?

The government is currently consulting on changes to the legislation governing the transfer of pension benefits from one scheme to another.

The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations (the Regulations) were introduced in 2021 with the aim of reducing the prevalence of pension scams, to which those wishing to transfer their pensions are vulnerable. 

Feedback from industry has been that the Regulations generally serve their purpose, and that they reduce the risks posed to pension scheme members and trustees alike. But they are not perfect. One example is that the Regulations require trustees to treat many transfers involving a scheme with overseas investments as having an “amber flag”, meaning the member must attend a session with MoneyHelper before they can go ahead with their transfer. As many commentators have rightly pointed out, legitimate schemes often hold investments in overseas funds and assets, and this condition means that some legitimate transfers are being held up as MoneyHelper struggles to keep up with demand. 

Another example is the prevalence of pension scams involving SSAS schemes. At the moment, the Regulations require trustees to ask a member wishing to transfer to such a scheme to provide evidence that they are employed by the scheme employer. But if the evidence provided is insufficient to demonstrate the employment link, the trustees can still go ahead with the transfer (after the member attends an appointment with MoneyHelper). This, many say, means that trustees are having to let many suspicious transfers to unorthodox SSAS schemes go ahead.

So, what is changing…and will it work?

• Overseas investments - The amendments proposed to the Regulations will remove the overseas investment condition entirely, which is good news for those wishing to transfer to a legitimate scheme which happens to have an overseas investment holding. The overseas investment condition was a blunt instrument, and it is positive that the government has listened to industry concerns about its impact.
  
  
• Transfers to occupational pension schemes – The amendments include provision for trustees to refuse a transfer to an occupational pension scheme, in the event that the member is unable to provide evidence of being an employee of the scheme employer. This amendment will go some way to reducing the prevalence of scams involving SSAS schemes.
  
  
• “Reputable” schemes – At the moment, the Regulations treat transfers to master trusts, public sector schemes and collective defined contribution schemes as transfers which do not require further due diligence or a referral of the member to MoneyHelper. The amendments to the Regulations introduce provision for trustees to decide that, notwithstanding the fact a scheme may not meet any of these criteria, they can process the transfer if the scheme is considered to be “reputable”. This provision has been included after the government received feedback that transfers to many legitimate schemes were being subjected to further due diligence just because the receiving scheme was not one of the specified types deemed to be safe harbours.
  
  The inclusion of the “reputable” provision could solve this issue; but questions will exist about what “reputable” means for these purposes. The government has said that it will include a list of factors in the Regulations that trustees should consider when making their assessment of whether a scheme is reputable. But additional guidance would be beneficial for trustees on what this means in practice. For example, the government has suggested that the nature and risk profile of the receiving scheme’s investments should be one factor that trustees should consider. But consider to what extent? It is surely not the government’s intention that trustees spend time (and money) asking their investment advisers to pass judgment on the specific investments in a receiving scheme every time they receive a transfer request, but one interpretation of such a provision would require this. 
  
  The reality is that trustees need to feel comfortable relying on the new provision before they will use it to let transfers go ahead without further due diligence. If that clarity is not forthcoming, the intention behind introducing the provision will be frustrated due to lack of use.

One thing that doesn’t appear to be changing in the Regulations is the “incentives” condition, whereby the provision of incentives to a pension scheme member, in connection with their proposed transfer, is considered a “red flag” that allows trustees to refuse the transfer. Commentators have pointed out that incentives can be an entirely legitimate part of commercial activity, whilst many others have raised questions about what should count as an “incentive”. The government’s position is that it does not intend to remove this condition from the Regulations, on the basis that incentives are a feature of many pension scam cases. If government will not clarify the Regulations, it should instead ask the Pensions Regulator to update and expand its guidance on this issue.

If you are a trustee and would like to speak about transfers to or from your scheme, feel free to get in touch.

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