On 30 November 2021, significant changes to the statutory transfer regime came into force. The changes aim to protect members from pension scams by enabling trustees to block transfers to another pension scheme if certain conditions are not met. We previously covered the detail of the new regulations, including the new red flag and amber flag process, in a client alert (which can be found here). 

In this, the first of two posts on this topic, we look at some of the practical concerns which have been raised regarding the requirement for trustees to consider whether schemes to which members wish to transfer have “overseas investments”, and at what trustees can do to minimise risk. In the second post which will follow next week, my colleague Alasdair Smith will then look at further issues which have been raised in relation to non-statutory transfers and unregulated financial advisors.

What are the potential issues?

As part of the new transfer process, trustees and scheme administrators must now check whether a proposed transfer triggers any “red flags” or “amber flags”. If there is a “red flag” trustees cannot process the transfer. If there is an “amber flag”, members must seek guidance from the Money and Pensions Service (“MaPS”) before proceeding with the transfer.

A particular focus of concern has been the “overseas investments” amber flag. The Pensions Regulator (“TPR”) addresses this in its guidance, saying: “the specific concern here is… whether the investment is in assets or funds where there is a lax, or non-existent, regulatory environment or in jurisdictions which allow opaque corporate structures”. The legislation, however, appears to be much broader than this. It simply states that there will be an amber flag if the receiving scheme includes overseas investments. This description appears to catch a huge number of pension schemes, many of which should not give rise to concerns regarding pension scams. In our view therefore, it would be prudent for trustees to be cautious in their approach towards this flag, at least until the meaning of “overseas investments” has been tested or the scope of the regulation itself has been narrowed.

In connection with this issue, concern has also been raised about the “clean lists” (i.e. lists of receiving schemes considered to be low-risk) being operated by some scheme administrators. Although the use of these lists can be a valuable tool in reducing the administrative burden required by the new changes, some of the clean lists may contain schemes which would technically trigger the overseas investments amber flag. Trustees should therefore work with administrators to ensure that any clean lists are used properly – they should consider, for example, whether they need to review administrators’ clean lists themselves, or whether a formal protocol for the creation and use of lists by the administrators is sufficient. Any lists should certainly be reviewed and updated regularly to ensure that the schemes included continue to present a low risk. 

Another potential issue is that MaPS may not have the capacity to provide members with the required guidance in a timely manner. This is of particular concern given the scope of the overseas investments amber flag discussed above, which will likely lead to a high volume of guidance requests. Given the scope of the amber flags, there is a real risk of a backlog in members receiving the required guidance and subsequent delays in the payment of their transfer values. As trustees need to see evidence that a member has taken scams guidance before they can approve a transfer (if there has been an amber flag), this raises the risk that trustees could miss the six-month statutory deadline for making the transfer. 

What can trustees do to minimise risk?

Given the potentially onerous due diligence obligations on trustees in relation to overseas investments, and the requirement in many cases for members to take scams guidance from MaPS, trustees and scheme administrators will need to react promptly and efficiently in response to any transfer requests to ensure transfer values are paid on time and to minimise the likelihood of member complaints. 

It is therefore vital for schemes to have a clear procedure in place to avoid any delay. If they have not already done so, trustees will need to work with scheme administrators to establish a policy for dealing with transfer requests. This could set out:

• the decisions which will be delegated to administrators, and the decisions which need to be taken by the trustees;
• the types of evidence which will be expected in relation to each red and amber flag;
• the rules for the use of clean lists, including how often these should be reviewed; and
• any changes which need to be made to member communications.