The Government is consulting on major changes to the law on transfer values.  In future trustees may need to make additional checks or require the member to take "scams guidance" from the Money and Pensions Service depending on the type of receiving scheme.  Deciding which requirements apply won't always be straightforward, with trustees potentially liable if they get it wrong.

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 published on 14 May which runs until 10 June 2021. 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 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 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 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.

QROPS  

For a transfer to a "qualifying recognised overseas pension scheme" (QROPS), the trustees 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 trustees of 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.

Our thoughts

The draft regulations represent a radical overhaul of the CETV regime.  The thinking behind insisting of evidence of an "employment link" before allowing a transfer to most occupational pension schemes is clear.  Small self-administered schemes have frequently been used as vehicles for scams.  However, the detail of the "employment link" requirements introduces more "red tape" in relation to legitimate transfers and could in some circumstances block them altogether.  It is not clear why a specific requirement to evidence member contributions (as well as employer contributions) to the receiving scheme has been introduced, and it is not 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 should consider now how they may need to adapt existing processes to comply with the regulations.

General levy changes confirmed

On 4 March the Government published its response to its consultation on the General Levy which confirmed that it would proceed with its proposed changes.  The General Levy (not to be confused with the PPF levy) funds the core activities of the Pensions Regulator, the activities of the Pensions Ombudsman and the pensions-related activities of the Money and Pensions Service.  The consultation response confirmed that the Government would proceed with plans to increase the levy rates and to introduce four separate sets of rates for defined benefit schemes, defined contribution schemes other than master trusts, master trusts, and personal pension schemes.  The levy payable is generally calculated on the basis of an amount being payable per member, with that amount varying according to the number of members in the scheme.  The regulations making the changes came into force on 1 April 2021.

Call for Evidence on the Social element of ESG investing

The government has launched a call for evidence seeking views on how pension scheme trustees understand social factors and how they are included in their Environmental, Social and Governance (ESG) policies.  The call for evidence says that consideration of ESG factors has been dominated by climate change and that social factors have been given less attention.  The call for evidence says that social factors are wide-ranging and will mean different things to different people.  Examples of social factors include: health and safety in a company's supply chains, a company's product quality and safety, and management of human rights.

The Call for Evidence runs until 16 June 2021.

Exemption for pension schemes from derivatives clearing obligation extended by a year

The European Commission has published a regulation to extend for one year the existing exemption for pension schemes from the obligation that would otherwise arise under EU law for pension schemes to clear derivatives trades via a central counterparty.  The exemption broadly applies where pension schemes enter into derivatives contracts for hedging purposes.  The new exemption runs until June 2022.