….Hold your horses….. Does this mean scams will disappear and we can have an easier life in the pensions industry? No such luck I’m afraid. You might need to pop that bubby back in the fridge for a while.

The regulations finally emerged this month after a lot of consultation and juggling of different perspectives; not an easy job. They are loosely based on the good practice set out in the PSIG Code – the red and amber flags are pretty much the same, so we are pleased to see them. Until now, trustees have had to hold their noses and hand over the transfer value to honour the statutory right to it, when even a blind man on a galloping horse could see the danger to the member. Now the statutory right is not so solid. Certain conditions have to be met in order for the right to exist. The new regulations give the tool that schemes need to safely refuse transfers that look like scams. 

The policy intent behind the regulations is exactly right. Carry out enough due diligence to be confident that none of the red or amber flags is present in a requested transfer. If you are confident, then you can pay the transfer under the statutory right. If not, and you believe there’s a red flag, you can refuse. If you believe there is an amber flag, then you ask the member to make an appointment with the MoneyHelper service. If he comes back with his confirmation code, you can pay the transfer, but if not, a red flag is present and you can refuse the transfer, or the member has effectively changed his mind. 

Government policy is based on preventing the minority of transfers that are scams, circa 5% of the £35bn of transfers paid out in a year and allowing straightforward transfers to continue unhindered. Perfect, common sense prevails anda victory for member safety and affirmation for all those trustees and providers who take great pains to do the right thing. Scammers decide the game’s up and move onto something easier. Simple. Lovely. …I jolt awake at this point.

The law can’t be interpreted by common sense, only by what the law says.  Pensions is never straightforward, even when you try to make it so. The complexities of the law and the practicalities of administering processes often get in the way. So while these regulations are a huge leap forward in member safety, they include a couple of wrinkles that could have some unintended consequences.

Firstly, there is little time for practitioners to digest the regulations as we only had days before they come into effect. I’m sure this was to catch scammers on the hop, as well as to ensure the regulations could be laid in this parliament. However, it also makes things hard for administrators.

Secondly, a late drafting error means that any receiving scheme that includes an overseas investment (most of them will include some global equities for example) will be amber-flagged unnecessarily and worse still, referred to MoneyHelper. This could delay transfers, leading to complaints and could overwhelm MaPS and create a log jam. This is not the intention. The pensions regulator has helpfully softened the wording of their guidance to highlight that “overseas investments” does not mean typical overseas equities. Of course it doesn’t, but the problem is that’s what the law says.

PSIG has not yet finalised its Scams Code V3 while we work out a good way to resolve this issue and see common sense prevail, but it will take some fancy footwork and some protection for schemes that use common sense when applying the regulations. We are also working on ways to incorporate the administrative requirements, like notifications and timelines in an easy way.

The first condition is easy. If the transfer is to a prescribed type of scheme, then the statutory right is automatic and no other tests need to apply. Although those safe schemes are limited in number, that’s a job done. Where we could come unstuck is on the second condition.

The regulations only apply to the statutory right to transfer. This means that discretionary transfers, drawdown transfers and most partial transfers are unaffected. If, like many contract schemes, you process transfers on a discretionary basis and resort to the statutory right where you are not satisfied that a transfer is appropriate, then the new regulations should not impact you very much. You just need to make sure that your discretionary decisions are based on robust due diligence. Most insurers, and many large schemes and administrators, have strong checks and run comprehensive “clean lists”, while straight though transfers tend to be between trusted parties. Continuing this practice would avoid slowing down transfers needlessly and allow transfers that are “dodgy” to be caught by the statutory right safety net.

The pensions regulator has stated quite clearly that a discretionary transfer route should not be used to avoid carrying out due diligence. If you already use it, as above, you can continue, but if you don’t currently carry out due diligence and introduce discretion (where rules allow) without introducing due diligence checks, you will run a significant risk of being found at fault in any future complaints.

It would be a terrible shame, if, having reached this point where we get ahead of the scammers, a couple of loose words sinks us. We need to make sure they don’t.