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November 2021 saw a major development in the fight against pension scams, with new regulations coming into force to give schemes significantly more power than they had before to refuse statutory transfers where they considered there to be a risk that the transfer is part of a scam.
The new regime ushered in the era of red and amber ‘flags’ – red stopping a transfer in its tracks, and amber requiring a member to take pensions safeguarding advice from MoneyHelper before a transfer could proceed.
TPR provided accompanying guidance and an overview of the decision-making process for trustees and managers.
But the new regime has not been without controversy, eliciting much comment and debate over the last 15 months.
Particular areas of concern have included how to apply the regulations where overseas investments or small-scale incentives feature in the transfer, with schemes finding that the majority of potential transfers are caught by at least amber flags and that transfers generally are taking longer to process than before.
In July 2022, the DWP and TPR took the unusual step of trying to clarify matters, issuing a joint statement on the regulations and some changes to TPR’s guidance. The update suggested that trustees consider using discretionary powers under their scheme rules to make a transfer despite the presence of an incentive payment or overseas investments in the receiving scheme – where trustees consider the risk of a scam to be otherwise low. But the possible divergence between policy intention and the legislation left schemes, to some commentators at least, trying to balance the black letter of the law against seemingly more permissive and pragmatic guidance.
PSIG publishes a voluntary Code of Good Practice on combating pension scams (‘the Code’). The Code sets out steps for carrying out due diligence and assessing member requests, together with examples of different types of pension scams, case studies and example standard documents. It is viewed as best practice and industry standard on due diligence; while it doesn’t replace or override existing requirements or regulatory guidance, it has been treated as an inherent part of the scams armoury since its first publication.
Originally published in 2015, the Code has been regularly updated, with the current version (2.2) launched in April 2021. At that time, a further update was expected in late 2021 when the new regulations came into force, but this did not materialise. PSIG has now published its ‘Interim’ Guide, acknowledging the complexities of the new regime and addressing what is viewed as the current position until the ‘inconsistencies’ can be addressed by the DWP’s forthcoming review (see below).
The Guide, which should be used on a standalone basis for now, details the key due diligence steps that pension schemes and practitioner should undertake when assessing a transfer. This updated version looks at some areas of ‘difficulty’, examining the risks related to incentives to transfer, and providing a detailed consideration of ‘clean lists’ (a list of personal pension arrangements that have, through ongoing due diligence processes, been established not to be scam arrangements and so where a transfer may be made more readily) – both the risks of keeping one, and the risks of not doing so.
It focusses largely on the statutory right to transfer (which provides a discharge to trustees) and is directly impacted by the new legislation. The Guide reminds schemes that the use of discretionary powers (where rules permit) should not be seen as a way to avoid the strong due diligence expected to help prevent scams – “in fact… the due diligence requirements for both routes should be similar. The Pensions Regulator has stressed this point in its guidance.”
The Guide warns that the full Code and its other related documents have not been updated, and that caution should temporarily be exercised in referring to them, reading them within the context of this interim Guide. Where there is potential conflict between current regulatory guidance and the legislation, the Guide notes this, but notes that “ultimately, it is the interaction of the legislation and your scheme rules which determine both your legal obligations and where discretion and judgement could be used. If you are unsure, you should take the legal advice you deem appropriate.”
New guidance in the transfers and scams sphere should always be taken on board in a timely fashion – as recent Pensions Ombudsman judgments have shown. In addition, in ensuring that they are acting in line with industry practice, and working to the tone of guidance as well as the letter of the law, schemes have much to balance (see our March 2023 Pensions Ombudsman Update for more on this).
Trustees and scheme managers should now:
In the meantime of course, complaints and claims continue to be made in respect of historic transfers. When faced with these, trustees or scheme managers should seek legal advice without delay.
The DWP’s review of the transfer regulations is due imminently. PSIG expects to issue a full update to all the Code documents (including this Guide) following the review, with the revised suite hopefully due by the end of the year.
22 March 2023