Government plans major changes to transfer values regime
Major changes to the law on statutory cash equivalent transfer values (CETVs) are proposed in a Government consultation. The Government intends to introduce the regulations in Autumn 2021. The proposed changes are designed to reduce the risk of members falling victim to pension scams, but will significantly increase the level of checks and analysis which trustees/scheme administrators are required to carry out before processing a transfer value under CETV legislation. The conditions which will need to be satisfied before the transferring trustees pay a CETV will vary according to the nature of the scheme to which the member wishes to transfer.
Transfers to authorised master trusts, public service pension schemes and personal pension schemes operated by an insurance company
CETVs to authorised master trusts, "public service" pension schemes under the Public Service Pensions Act 2013 and to personal pension schemes operated by an insurance company authorised by both the FCA and Prudential Regulatory Authority (including a pension scheme which is a "subsidiary undertaking" of such an insurance company) do not require additional checks (and this will also be the case for a "collective money purchase scheme" established and authorised under the new regime provided for by the Pension Schemes Act 2021). However, it will be the responsibility of the transferring scheme trustees or managers to establish that the proposed receiving scheme falls into this category.
Other UK occupational pension schemes
Before a CETV can be paid to a UK occupational pension scheme that does not fall into one of the categories listed above, the member will have to provide specified evidence of an "employment link" with the scheme. This will require the member to provide:
- a letter from a sponsoring employer of the receiving scheme confirming that the member is employed by it and the date employment commenced. The member must have been employed for at least 3 months on a salary at least equal to the National Insurance lower earnings limit at the point of receipt of the transfer request;
- a schedule showing that both the member and employer have contributed to the scheme over the past 3 months; and
- payslips and bank/building society statements showing that the member has been paid by the employer for the last three months.
Other UK pension schemes
For proposed transfers to UK pension schemes not falling within the above two categories (ie in practice personal pension schemes not operated by an insurance company), the trustees/provider will have to assess whether "red flags" or "amber flags" are present. The presence of red flags means that there is no right to a CETV. If amber flags are present, the transfer can proceed, but only if the member first takes "scams guidance" from the Money and Pensions Service (MaPS).
The following are classified as red flags:
- a refusal by the member to respond to a request for information which is designed to elicit whether red flags are present;
- a failure to provide evidence of having taken MaPS scams guidance where amber flags are present;
- the member has received financial advice in relation to the transfer from someone without the appropriate regulatory permissions or such a person has made a recommendation to transfer without formally providing financial advice. This is subject to an exception where the member has received advice from an overseas adviser in relation to overseas investments;
- the member's transfer request was made further to unsolicited contact from a party previously unknown to the member;
- the member has been offered an incentive (including an offer of a free pension review) to make the transfer;
- the member has been pressured to make the transfer within a time-limited period of one month or less.
Amber flags are present where:
- there are "high risk" or unregulated investments included in the receiving scheme;
- there are unclear or high fees being charged by the receiving scheme;
- the investment structures of the receiving scheme are "unclear, complex or unorthodox";
- the receiving scheme includes overseas investments or an overseas adviser has advised the member in relation to such investments;
- the trustees are aware of a high volume of requests to make a transfer from their scheme either to a single receiving scheme or involving a single adviser or firm of advisers or both.
For a transfer to a "qualifying recognised overseas pension scheme" (QROPS), the trustees/provider need to be satisfied either that the requirements for a transfer to an occupational pension scheme are met or see documentation evidencing that the member has been resident for at least 6 months in the financial jurisdiction in which the QROPS is established.
Information to be provided to members
The transferring scheme must provide the member with information about the conditions which must be satisfied in order for the transfer to proceed. This must be done within one month of the date on which the member requests a CETV statement or makes a request to make a transfer, whichever is the earlier.
The draft regulations represent a radical overhaul of the CETV regime which is designed to reduce pension scams. However, the "employment link" requirements which need to be satisfied before a CETV is paid to an occupational scheme (eg the requirement to show recent member and employer contributions to the receiving scheme) risk acting as a barrier to legitimate transfers to SSASs. It is not clear why a specific requirement to evidence member contributions (as well as employer contributions) to the receiving scheme has been introduced. Nor is it clear how this is intended to operate where members contribute via a salary sacrifice arrangement, as all contributions in such circumstances are legally employer contributions.
The assessment of whether "amber flags" are present potentially requires trustees to make a complex judgement call. The consultation includes a questionnaire which trustees could ask members to complete, and also says that the Pensions Regulator and FCA will provide guidance for occupational and personal pension schemes respectively, but it seems likely that in many cases neither the guidance nor the questionnaire will provide trustees with definitive answers. Trustees may be inclined to err on the side of caution and require members to take MaPS scams guidance in such circumstances, but that could potentially lead to complaints from members that their transfer values have been unnecessarily delayed as a result of them being forced to take guidance where this should not have been required.
The Government says it plans to publish its consultation response at the same time as the final form regulations are made, so trustees and scheme providers should consider now how they may need to adapt existing processes to comply with the regulations.
Regulations extend obligation to report death benefits using Real Time Information
Regulations which come into force on 6 April 2022 will extend the obligation on scheme administrators to report certain death benefit payments to HMRC using its Real Time Information (RTI) system. The obligation applies to the following types of benefit where they fall outside the definition of "PAYE pension income":
- pension that is payable following a member's death under "pension rule 2" of the Finance Act 2004 (ie where a member dies within 10 years of becoming entitled to his pension and the member's pension continues to be paid to another person for a fixed period);
- pension death benefits; and
- lump sum death benefits other than benefits classified under the Finance Act 2004 as "defined benefits lump sum death benefit" or "uncrystallised funds lump sum death benefit".
Regulations make changes re reporting of tax and NICs real time information (RTI) errors
With effect from 6 April 2021, regulations have made changes to the process by which employers and pension providers report real time information (RTI) tax errors. The purpose of the regulations is to simplify the process by allowing employers and pension providers who need to correct inaccuracies more than 14 days after the end of the relevant tax year to simply report the corrected end of year payroll information rather than the difference between what they originally reported and what the correct amounts should have been.
Government plans to increase normal minimum pension age to 57
The Government has published the response to its consultation on increasing normal minimum pension age (NMPA) from 55 to 57 with effect from 6 April 2028. It has also published draft legislation to effect the change.
As proposed in the original consultation, the Government intends to allow members to retain their right to take benefits before age 57 if the scheme rules as at 11 February 2021 (publication date of the consultation) gave them the right to do so. This will apply regardless of when the benefits accrue. The Government will make this right available to members who have a right on 5 April 2023 to take benefits before age 57 provided the scheme rules as they stood on 11 February 2021 would have conferred the right to take benefits before age 57 on the member had the member been a member of the scheme on that date. The draft legislation containing the protection of the right to retire before age 57 refers to the member having "an actual or prospective right under the pension scheme to any benefit from an age of less than 57".
The consultation makes clear that the protection of a lower NMPA than 57 is intended only to apply to an "unqualified" right to take benefits before age 57. It says that HMRC will provide further explanation and examples in its guidance regarding what constitutes an "unqualified right". However, the Government is clear that rules that refer to the NMPA or permit benefits to be taken from the lowest age consistent with the Finance Act 2004 (rather than referring expressly to age 55) do not confer an unqualified right to retire before age 57, but simply confer a right to take benefits from the youngest age prescribed from time to time. The Government acknowledges that "there may be more nuanced cases where professional judgement is needed about the effect of particular drafting."
Rights following a transfer
The original consultation proposal was that a protected pension age of under 57 would be maintained on a bulk transfer to another scheme, but there was no proposal to preserve a protected pension age on an individual transfer. However, the Government has now altered its plan and is proposing to allow a protected pension age to be preserved on an individual transfer. Where a protected pension age is preserved on a transfer in, the Government says that the protected pension age is only intended to apply to the transferred in rights, not any other rights the member may accrue in the scheme. This is reflected in the draft legislation on individual transfers. However, if this is the policy intention for bulk transfers, it is not clear how the wording of the draft legislation achieves the policy intention.
It appears that if a member transfers benefits on or before 5 April 2023 to a scheme with rules that, as at 11 February 2021, would have given the member an unqualified right to take benefits from age 55, the member will enjoy a protected pension age of 55 in relation to the member's entire fund, including the transferred in benefits.
Whether members will retain a NMPA of 55 under the transitional measures will hinge on the exact wording of a scheme's rules, in particular: (a) whether the member has an unqualified right to take benefits from age 55 or whether the right is subject to the consent of another person such as the scheme trustees; and (b) whether the scheme rules make specific reference to taking benefits from age 55 or whether they cross-refer to NMPA under the Finance Act 2004 without specifically mentioning age 55.
The proposals could in some cases result in a member enjoying a "protected pension age" of 55 in relation to transferred in benefits, but a NMPA of 57 in relation to non-transferred in benefits. This will clearly add complexity to the administration of the scheme.
"Stronger nudge" to pensions guidance: parallel consultations by DWP and FCA
The DWP and FCA are carrying out separate but parallel consultations on rule changes to ensure that members receive or specifically opt out of Pension Wise guidance before receiving their benefits. The draft regulations in the DWP consultation will apply to trustees of occupational pension schemes providing money purchase benefits, and the FCA rules will apply to providers of personal pension schemes.
The draft regulations will generally apply where a member aged over 50 (or the member's survivor) applies to receive or transfer benefits. Before actioning the request, the trustees must offer to book a Pension Wise appointment for the individual. If he/she turns down that offer, the trustees must provide details of how to book a Pension Wise appointment directly. To opt out of receiving Pension Wise guidance, the individual must give an "opt out notification". In most cases, the opt-out notification must be given as a separate communication, not as part of the original request or during the interaction with the trustees resulting from that application.
The consultation document itself does not specify when the changes will come into force, but the 6 April 2022 appears in square brackets in the draft regulations as the coming into force date.
The consultation runs until 3 September 2021.
In a parallel development the FCA has consulted on new rules which will require pension providers to:
- refer the consumer to Pension Wise guidance;
- explain the nature and purpose of the Pension Wise guidance and encourage the consumer to take it; and
- offer to book a guidance appointment and where the consumer accepts that offer, book the appointment or provide the consumer with sufficient information to book their own appointment.
The FCA will also require providers to confirm and record whether the consumer:
- declined the offer to receive Pension Wise guidance;
- received Pension Wise guidance; or
- received regulated advice.
The FCA's consultation closed on 29 June 2021. It will seek to publish a final Policy Statement in Q4 2021.
Bill provides for pension products to be included in dormant assets scheme
In May the government published the Dormant Assets Bill which will extend the existing dormant assets scheme to a wider range of financial products including certain pension products.
A "dormant asset" is a financial product that has not been used for many years and which the provider has not been able to reunite with its owner. The existing dormant assets scheme distributes assets from dormant bank and building society accounts to good causes while retaining funds to meet any future claims on them. Accounts must be dormant for 15 years to be transferred to the scheme. The scheme operates on the principle that a firm's first priority is to trace and reunite people with their assets. At any point, asset owners can reclaim the amount that would have been due to them had a transfer into the scheme not occurred. Firms can choose whether or not to participate in the scheme.
The Bill will extend the definition of dormant assets to include:
- benefits in the form of income withdrawal that have become payable under a personal pension scheme; and
- benefits which have become payable or are available for immediate payment under a personal pension scheme which provides solely money purchase benefits and which has not at any time been a "qualifying scheme" or "automatic enrolment scheme" in relation to the relevant member under automatic enrolment legislation.
Benefits provided from with-profits funds are excluded from the dormant assets scheme.
Pension benefits are classified as dormant if any of the following conditions are satisfied:
- the provider has been notified that the person in respect of whom the benefits are payable has died, and the provider is satisfied that there is no person to whom benefits are payable or who is entitled to receive payment of the benefits;
- the provider has been notified at least seven years ago that the person to whom the benefits are payable has died, and has not received any communication from anyone administering the deceased's estate or who is entitled to receive the benefits;
- the person in respect of whom the benefits are payable would be at least 120 years old and, in the previous seven years, the provider has received no communication from a person administering the beneficiary's estate or who is entitled to receive the benefits; or
- income withdrawal benefits have ceased to be payable due to the pension contract term ending at least 7 years ago, and since then the provider has not received any communication from the person to whom the proceeds are payable.