First mooted five long years ago in a joint DWP-Treasury consultation, they restrict the circumstances in which an individual has a statutory right to transfer their pension benefits.
Transfers to public service schemes and authorised master trusts can go through on the nod, but trustees are expected to investigate all other transfer requests more carefully. Any of several specified ‘red flags’ unveiled will block the transfer; and if any less serious deficiencies raise an ‘amber flag’, the member will have to take guidance from MoneyHelper first. The objective is to lessen the risk of transfer to a scam arrangement.
An original stimulus was the case of Donna-Marie Hughes v Royal London Mutual Insurance Society Ltd, which involved an individual who had possibly being cold-called, leading to a request for a transfer to a one-person SSAS, established by a dormant employer from which the individual had received no earnings. The new regs, on top of a ban on cold-calling from 9 January 2019, mean such a case today would raise several red flags and not meet the requirements for a statutory transfer.
Scammers have moved on in the past five years, though: most suspect transfers these days involve personal pensions, especially so-called ‘International SIPPs’. For these, the new regs are less satisfactory. Almost all will raise amber flags, because there are high risk, unregulated or overseas investments included in the receiving scheme, or there are unclear or high fees being charged, for example.
The potential for MoneyHelper (a MaPS brand) to be overwhelmed by the volume of mandated requests for guidance appointments is evident; but that isn’t my main point here. There is a wider and more important issue well-illustrated by these regulations.
Pensions legislation and regulation suffers from an endemic tension between a desire of those who craft it – and, it has to be said, of those who must abide by it – for comprehensive coverage of all circumstances in precise and unambiguous terms; and on the other hand a need for it to be comprehensible, proportionate and effective. Pension savings being property rights, there are also overarching concerns about fairness which inevitably add complexity.
These new transfer regs might be recognised in time as the high-water mark of the philosophy that human misbehaviour can be effectively controlled by legislation. We’re accustomed to seeing definitions of key terms in legislation, especially where their precise meaning might be different from use in other contexts. However, I cannot recall anywhere before seeing regulations where such words and phrases as ‘high risk’, ‘included in’, and ‘overseas’ had to be defined, as they are here.
There is an unusual - but not entirely satisfactory – solution provided, however; in Regulation 10(2). This allows trustees to decide that a transfer to a personal pension can go ahead, without formally seeking further evidence or information from the member, if taking into account everything that they know about the receiving scheme and provider and “on the balance of probabilities”, none of the red or amber flags are present.
In almost all cases trustees will have to turn a blind eye to the existence of some overseas and/or high risk investments, if a transfer to a personal pension run by a household-name insurance company, for example, is to be waved through. If trustees do that though, they are making a discretionary, or ‘non-statutory’ transfer, for which they might not obtain a discharge of liability. They also risk an Ombudsman complaint later on.
In the particular instance of interpretation of “any overseas investments”, The Pensions Regulator has sought to ‘clarify’, in associated guidance, that this excludes global equity funds; but this is not legislation, and so trustees are likely to be cautious. An adverse Ombudsman Determination can be extremely costly and damaging.
It can be much more costly to go to court, as shown in a series of cases brought to decide the precise meaning of wording governing pension increases in deferment or payment. These have been triggered by a legislative change in the index of inflation from RPI to CPI from 2011. Before, scheme rules were drafted in an era when ‘RPI’ and ‘inflation’ were regarded as virtually synonymous. Courts have had to decide on the ordinary meaning of words.
So if legislation can never be precise, unambiguous and comprehensive while at the same time remaining accessible, effective and proportionate as a framework for operation of economic affairs, what is the alternative? A better way has been argued by Robin Ellison in his magisterial survey of the problem, “Red Tape: Managing Excess in Law, Regulation and the Courts”.
Suffice it to say that we need a better balance between law and regulation, with more authority vested in Codes of Practice and statutory guidance written by experienced regulators who appreciate proportionality. We’re making progress, but the urge to protect every individual and every pension pound in legislation will have to be restrained. After all, every year billions of taxpayers’ money apparently goes to waste, with no compensation.
Ian Neale, Co-Founder, Aries Insight
