Major changes to the law on transfer values took effect on 30 November 2021.  The changes are designed to reduce the risk of members falling victim to pension scams. 

For transfers to most schemes, trustees will need to decide whether there are any "red flags" or "amber flags" as defined in the legislation.  A red flag is an absolute bar to the transfer.  An amber flag means that the transfer can only proceed if the member first takes "scams guidance" from the Money and Pensions Service (MaPS).  

Transfers to certain types of scheme are exempt from the requirement to consider whether red or amber flags are present, namely transfers to public service pension schemes, authorised master trusts and authorised collective money purchase schemes.  In a change from the original proposals, the presence of red or amber flags will always need to be considered for a transfer to a personal pension scheme.  (Under the original proposals, transfers to some personal pension schemes operated by insurance companies would have been exempt from the requirement.)

For a transfer to an occupational pension scheme that is not exempt from the need to consider flags, trustees will be required to request evidence that the member has an "employment link" with the scheme.  The regulations set out detailed requirements that must be met in order to satisfy the employment link requirements.  In a change from the consultation proposals, the inability to satisfy the employment link requirements will not be an absolute bar to transfer.  Instead it will be an amber flag, meaning that the member must take MaPS scams guidance before the transfer can go ahead.

The regulations also contain specific provisions dealing with transfers to "qualifying recognised overseas pension schemes" (QROPS), in relation to which the trustees must request either the required evidence of an employment link (applicable only if the QROPS is an occupational pension scheme) or the required evidence of a "residency link", ie evidence that the member is resident in the country in which the QROPS is established.  Failure to provide such evidence is not an absolute bar to a transfer, but is an amber flag, meaning that the member must take MaPS scams guidance before the transfer can proceed.

Red flags

The following are "red flags", meaning that a transfer cannot proceed:

• failure by a member to respond to a request for evidence of an employment link or residency link where applicable;
• failure to provide evidence of having taken MaPS scams guidance where the member is required to do so before the transfer can proceed;
• the trustees decide that:
  • an unauthorised person has carried out an activity without the required FCA permissions (eg investment advice);
  • the member's request to transfer has been made further to "unsolicited contact" for the purpose of marketing the transfer (eg "cold calling");
  • the member has been offered an incentive to make the transfer (other than an incentive provided by the transferring scheme trustees or sponsoring employer);
  • the member has felt pressured to make the transfer.

Amber flags

The following are "amber flags", meaning that a transfer can only proceed after a member has taken MaPS scams guidance.

The trustees decide that:

• the member has not provided evidence of an employment link or residency link where the trustees are required to request this;
• evidence may not be genuine or has not been provided directly by the member;
• evidence purporting to demonstrate an employment link or residency link does not actually do so;
• 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 structure of investments included in the receiving scheme is unclear, complex or unorthodox;
• there are overseas investments included in the receiving scheme; or
• there has been a sharp or unusual rise in the volume of requests:
  • to transfer to a particular receiving scheme; or
  • involving the same adviser or firm. 

What checks are transferring schemes required to make?

The regulations now make clear that transferring schemes are not required to ask specific questions checking for the presence of each amber flag. If the receiving scheme is an occupational pension scheme and/or QROPS they will need to request evidence of an employment link or residency link as applicable (unless the receiving scheme is an authorised master trust, public service pension scheme or authorised collective money purchase scheme).  Other than that, it is for the trustees to decide what due diligence checks to make in relation to a proposed transfer.  However, the Pensions Regulator has published guidance setting out certain information which it considers should be collected as a minimum.

Our thoughts

There is general agreement among pensions lawyers that the wording of the regulations does not match up with the policy intent.  Taken literally, the amber flag of "overseas investments in the receiving scheme" could mean that any GPP offering an investment option in overseas equities will be caught.  The Pensions Regulator's guidance makes clear that this is not the policy intention.  It suggests that schemes may keep a record of low risk personal pension schemes to which transfers can proceed without additional checks (a "clean list").  However, transferring schemes are left in the difficult position of having to decide how literally to apply the regulations. 

The regulations in final form are better news for many SIPP and SSAS providers than the first draft on which the Government consulted.  The first draft would have prevented many legitimate transfers to SSASs due to members being unable to show an "employment link".  It would also have created a two tier system for transfers to personal pension schemes by exempting transfers from the need to check for "flags" where the transfer was to a personal pension scheme operated by an insurance company authorised by both the FCA and PRA.