In March 2020, I wrote about the dilemma pension scheme trustees frequently face with member requests to transfer their benefits to another scheme.

Often, trustees may have legitimate concerns about a proposed transfer. However, despite flagging these to members, they may ultimately be unable to prevent an insistent member (with a statutory right) from transferring out their benefits.

At the time of my original post, we were promised regulations to crack down on pension scam risk. Although these were thin on detail at the time, they seemed poised to take some of this burden away from trustees with a new traffic light-style red and amber “flag” system. The new regime has since come into force for transfer requests from 30 November 2021.

In this post, I look at some of the challenges for trustees since the red and amber flag regime came in, and potential areas the government could look at when the regulations are next up for review.

Amber gambler

If trustees identify any of the “amber flags”, they must require a member to take MoneyHelper guidance before a statutory transfer can proceed (a member failing to do so is a red flag that would prevent the transfer). However, initial feedback from trustees is that some amber flags are so broadly worded or subjective that, in most cases, the safer approach seems to be to refer the member to MoneyHelper.

By way of example, two of the new amber flags include:

• where the receiving scheme includes “overseas investments”. On its face, this term captures almost any investment denominated in a foreign currency or relating to a foreign-based company or fund. While the Pensions Regulator and FCA have both said the policy intent is aimed at investments which may not enjoy a high degree of domestic regulatory protections (such as the UK’s Financial Services Compensation Scheme), it leaves trustees in an unsatisfactory position. This is especially so following the Pension Regulator’s recent suggestion that trustees could get around statutory requirements by offering discretionary transfers instead. Given the Pensions Ombudsman has typically held trustees to the benchmark of industry best practice when transfers have gone wrong for members, simply ignoring or bypassing a legislative requirement seems far from ideal.

• where the receiving scheme has “high charges”. This requires trustees to reach their own view, based on the current financial market, on whether fees are at the higher end of the scale or don’t bear a reasonable relationship to the proposed benefits of the receiving scheme. However, it seems impractical to expect most trustees to have access to up to date fee benchmarking data for this purpose (even if they may have some experience through their own scheme). In addition, requiring trustees to judge the proposed benefits of a receiving scheme potentially risks straying into the field of expertise of financial advisers, who are much better placed to assess the benefits of a transfer based on the member’s personal circumstances. A clearer set of fee parameters regularly published by the FCA, tPR or even the Pension Scams Industry Group might instead provide a more objective and professional set of benchmarking criteria.

Similar subjectivity considerations also apply to many of the other red and amber flags, or which require significant new diligence processes and checks to reach a sensible conclusion. It seems that for now, trustees are best placed to mitigate the risk of members challenging their decisions by having in place transparent and (as objective as possible) assessment criteria which take into account, as far as they are able, the latest regulatory and industry guidance.

Not so red flags?

Another area in which we have seen various queries relates to the red flag of providing members with “incentives” to transfer. The term “incentive” is deliberately not exhaustively defined in the legislation, and so, other than employer-sponsored transfer incentives, which are expressly carved out from the definition, there seems little upside in trustees adopting anything other than a more cautious interpretation. We have even seen legitimate pension providers in the market fall foul of this red flag as a result (having offered a small new joiner bonus).

Speed bumps

The new regime has also had the effect of condensing additional processes into already tight statutory timeframes. This makes timescales even more challenging, given the potential need for the member to seek IFA advice as well as book and receive MoneyHelper guidance. Having to take these additional steps within the same six-month timeframe makes it all the more crucial for trustees to communicate deadlines and requirements early on and make sure they action requests quickly. Clearly, the more steps trustees have to carry out, the greater the risk of a member being able to pin at least some of the blame on trustees for delays. Where the deadline is missed due to outstanding checks and it’s not clear if the trustees are partly to blame for delays, trustees might wish to consider discretionary extensions to the transfer deadline.

Spaghetti junction

From the key policy goal perspective of preventing fraud, the new red and amber flags have undoubtedly created additional hurdles for members wishing to transfer out. Based on the additional inconvenience alone, this may well end up reducing transfers and, by extension, instances of fraud.

However, the new regime has also transferred more of the risk of potential blame from policy-makers and authorities to trustees. Many trustees are reacting to this by taking a more cautious approach. Alternatively, they are being placed in the unenviable position of being expected to take frequent risk-based decisions (with the ultimate risk of being ordered by the Pensions Ombudsman to reinstate the member’s benefits if things go wrong). Either approach leaves trustees more exposed than they were before 30 November 2021.

The government has said that it will review the new regulations within 18 months of them coming into force. Clearly, any future changes will need to ensure that members’ interests are kept at the forefront. However, providing trustees with greater guidance and clarity need not conflict with this goal. In many cases, it would also avoid the unnecessary obstruction of low risk and ordinary course transfers and so be in all parties’ interests.