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Transfer Pains

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Trustees have, for a number of years, been at the forefront of a pension transfer renaissance. While in general terms, the introduction of pension flexibilities (through the government’s “freedom and choice” reforms in April 2015) has generally been seen as a positive step for pension scheme members, it has, and continues, to put the role of pension trustees under the microscope.

In this article we consider the evolution of the transfer process and the trustees’ role in it, as well as issues arising from past transfers, and potential future developments.

A step back
Hardly a year goes by without a fresh call for trustees to beef up their transfer processes. And in a changing and uncertain economic and financial world this looks set to continue, not least because those intent on ‘helping’ members find a home for their final salary (or defined benefit (DB)) benefits often seem to be ahead of the game with new ways of convincing people to transfer out.

But how did we get here? 
The focus on the role of trustees in pension transfers, and the level of due diligence expected of them, was first brought to the fore through the “Scorpion literature” published by the Pensions Regulator (TPR) back in February 2013. While the rules governing transfers had been around for a long time before then, the introduction of the “Scorpion literature” was considered by the Pensions Ombudsman to be a clear turning point in his expectations of what trustees should do. From a trustee perspective, this marked the moment from which they were expected to boost the checks and due diligence they carry out on receiving schemes, and on those involved in advising members to transfer.

The introduction of the pension flexibilities in April 2015 stirred up people’s interest in transfers because, for the most part, DB scheme members would need to transfer their benefits to a defined contribution (DC) arrangement in order to be able to use their retirement savings flexibly. As a protective measure, a new requirement for DB scheme members to take “appropriate financial advice” in relation to transfers was introduced, requiring members with DB transfer values over £30,000 to obtain regulated independent financial advice (and to prove to the transferring scheme trustees that they had done so). However, members are not required to follow the financial advice they receive, nor are the transferring scheme trustees entitled to know what advice has been given. This means that members who insist on taking a transfer can generally do so, even where the transferring trustees have serious misgivings about the wisdom of such a decision.

In a bid to combat the threat of members being targeted by unscrupulous advisers or unregulated intermediaries, a new working group was set up (now the Pension Scams Industry Group (PSIG)) to produce a code of good practice on “Combating pension scams” in April 2015 (revised and re-issued in June 2018). The code sets out a useful set of steps, checks and measures that DB schemes could include in their processes, to help them carry out appropriate due diligence when members request a transfer. While the code is not mandatory, nor backed by legislation or regulation, it is likely to be taken into account by the Pensions Ombudsman when considering whether or not trustees have met good standards of administration in carrying out due diligence checks when processing transfers. 

An increasing number of complaints about historic transfers
TPR’s guidance, the PSIG code and related publications from the Financial Conduct Authority, the former Money Advice Service (MAS) (now part of the Money and Pensions Service) and others have helped trustees in recent years to build and maintain appropriate due diligence checks into their transfer processes.

However, transfers which took place in the months and years following the publication of TPR’s “Scorpion literature” are increasingly coming under the spotlight in the form of complaints against transferring schemes.

But what exactly has been the catalyst for this increase in historic transfer complaints? There are a number of factors:

• The fact that, a few years after transferring out, members are now discovering that their new schemes are not what they were made out to be, or that they have been the victims of scams. With retirement savings potentially lost, and members possibly facing unexpected tax penalties some time after the transfer, it is no surprise that some are looking back at the processes which led to the transfer, with a view to seeking compensation from transferring schemes.

• At a more general level, members are regretting having transferred from a ‘safe’ DB scheme, into a DC arrangement in which they bear the investment risk, especially at a time of high volatility and potentially lower investment returns and/or expectations. Added to which, those involved in advising or encouraging individuals to transfer out may no longer be around to give redress, so the transferring schemes may offer the only hope of a remedy.

• The hype surrounding the introduction of the GDPR in 2018 prompted a fresh look by former members (and those acting for them) into the personal data still held by their transferring schemes. The fact that data subject access requests are now simple (and generally free) has led former members to use this method to try to obtain evidence about their former scheme’s transfer process, with a view to picking up evidence to establish whether there were any flaws in the processing of their transfer request.

• The Pensions Ombudsman’s ruling in the Police Pensions case (PO-12763). While this decision was fact specific, it resulted in the former member of the Police Pension Scheme, who had transferred out in 2014, being re-instated into that scheme. This has understandably given hope to others (and the advisers acting for them) that there may be a route to obtaining a favourable remedy.   

What should schemes initially look out for to be prepared for complaints about historic transfers?
While it may be the case that some schemes have little to be concerned about, having had robust transfer processes in place from the outset, this is unlikely to be the case for all schemes. 

Trustees need to bear in mind three basic points when laying some groundwork in this area:

• if a subject access request is made by a former member, what information are they obliged to provide;

• the time-period during which they may be at genuine risk of complaint from former members who have transferred out. This requires checking how their own due diligence process has evolved over time, to identify the period from which they can be reasonably assured of the robustness of their transfer process. This will help them determine over what earlier period there may be a risk that their process may not have been as thorough as might have been expected; and

• look at what due diligence process, if any, the scheme had during the period where there is risk. This may involve finding out whether, at the time of the transfer(s): 

          o there was a formal (written) process in place and, if so, whether that process was routinely followed;

          o what communications were issued to members and whether the transfer packs included any standard notices or enclosures warning about pension scams;

          o what discharges members were asked to sign as part of the process;

          o what communications took place with others involved on behalf of the member (such as any intermediary, adviser, receiving scheme, etc) and what information was requested from them;

          o what checks took place with other bodies, such as HM Revenue and Customs and TPR.

What does the future hold for pension transfers?

Inevitably, there will continue to be a keen focus on the administration of, and rules governing pension transfers. This focus will come from members, TPR and the newly named Money and Pensions Service (encompassing the former MAS, Pension Wise, and The Pensions Advisory Service (TPAS)) amongst others. One such example is the pensions cold-calling ban that was introduced in January 2019.

January also saw the publication of a “Joint Protocol” on transfers, by TPR, the FCA and TPAS. This was prompted by concerns and criticisms arising from the amount of transfer activity targeted at members of the British Steel Pension Scheme at the time of its restructuring in 2017, and is an example of TPR’s renewed focus on providing guidance for trustees. TPR also intends to make available materials and template communications which schemes trustees can tailor for their members. Trustees will no doubt welcome this more formal structure and guidance. 

While the “Joint Protocol” primarily provides template communications in relation to transfers for schemes facing structural re-organisation or intervention by TPR, the templates also offer useful guidance about the kind of information to be given to members generally about transfers, such as warnings against pension scams.

Through the “Joint Protocol”, TPR is also keen to obtain information about the level of schemes’ transfer activity. It wants to hear, on a monthly basis, from the trustees of schemes facing TPR intervention about:

o  the level of transfer activity in the scheme

o  the names of firms of advisers/intermediaries involved in transfer requests and

o  the receiving arrangements.

This information is designed to help establish whether there are patterns of scam activity across groups of members, for example, those living or working in the same geographical location, who may be targeted by a particular adviser. This is something that trustees may wish to do in any event, to be better informed and ready to act should their members appear at risk of being targeted by unscrupulous advisers.
The government believes that the time is right to consider introducing new legislative restrictions which would limit members’ statutory right to transfer to another occupational pension scheme. It remains to be seen whether the statutory transfer right will change, and if so how, but in its consultation on pension scams, the DWP proposed that the statutory right would exist only where:
• the receiving scheme is a personal pension scheme operated by an FCA authorised firm or entity

• a genuine employment link to the receiving occupational pension scheme can be demonstrated, with evidence of regular earnings from that employment and confirmation that the employer participates, or has agreed to participate, in the receiving scheme; or

• the receiving occupational pension scheme is an authorised master trust.

Another proposal for change is the introduction of a statutory cooling off period, whereby the transferring scheme would delay all transfers, for example by 14 days, to allow the member to reconsider their decision to transfer.

Transfers will remain a key area for schemes for some time to come, so trustees need to be aware of and pay heed to any new requirements or expectations placed on them, and administrative procedures will need to keep up with these changing requirements.

As recent history shows, the trend has been to continuously refine administrative processes so they are more resilient in a world where scammers are forever on the lookout for new ways to target pension monies.

At the same time, trustees need to be aware of the increasing focus on past transfers, and the rise in complaints. It will be important that trustees are prepared to deal with such complaints, even if none have been raised until now.

Arshad Khan, Associate Director at Sackers