The Importance and Challenge of the New Pension Transfer Out Regulations

Brian Radbone, Transact’s Head of Technical Services explores below. 

The Occupational and Personal Pension Schemes (Conditions for Transfers) 2021 regulations came into force on 30 November 2021, with accompanying guidance issued by The Pension Regulator, to provide further measures to combat the continuing scamming of pension members who continue to lose considerable amounts of their pension savings. The new regulations now give pension schemes the ability to stop a transfer out of benefits if they believe the member to be at risk of being scammed.

Whilst transfers out to public sector schemes, authorised master trust schemes and collective defined contribution schemes can proceed as before, schemes are now required to conduct additional due diligence on transfers out to any other scheme by asking members directly certain ‘red flag’ questions whether or not they are advised. These include how they were initially approached, if regulated advice has been given, whether there was any deadline pressure, if any incentives offered, if any non-UK resident individuals or firms were involved and how the transfer value is to be invested in the receiving scheme. If unsatisfactory answers are given, then the transfer can be stopped.

If the answers to the ‘red flag’ questions are acceptable, then a second level of due diligence is required to see if any ‘amber flags’ exist in the receiving scheme. These include any incomplete or ‘spoon fed’ answers to ‘red flag’ questions, any overseas, unregulated, or other higher risk investments available in the receiving scheme, opaque charging structures or a significant increase in the volume of transfers out to the same receiving scheme. If any of these flags are present, then the member should be referred to MoneyHelper for anti-scams guidance and the transfer cannot proceed until the transferring scheme has received confirmation that this has taken place.

Whilst schemes have attempted to compile ‘clean lists’ of schemes that present a limited scam risk, and so can be transferred to without applying the full due diligence requirements (for example the receiving scheme only offers standard investments) this must be done against the backdrop of what the regulations actually say. The DWP and TPR recently clarified the position with regard to overseas investments and small scale incentives which previously were technically all amber flagged in light of the wording in the regulations, but caution is still needed if schemes are not to find themselves liable in the future as a result of, for example, a member investing into an available high risk investment in the receiving scheme which had not been amber flagged at the point of transfer.

A review of the regulations is due to be published by the DWP in May 2023, but until that happens, or until any judgements are issued by the Financial Ombudsman Service or The Pension Ombudsman as a result of a scheme insisting on sending a member to MoneyHelper before allowing a transfer out to proceed, administrators and trustees should be cautious before applying a too light-touch approach. As well as avoiding possible future claims as a result of such an approach it should also help to avoid any further regulation which may happen if this latest version is less than effective in stopping members being scammed out of their pension savings.