DWP and TPR are encouraging trustees to use discretionary transfer powers in appropriate cases where the new restrictions on statutory transfers cause difficulties. Due diligence should still be carried out in all cases. In practice, there remain challenges.
Trustees and providers will be familiar with the issues surrounding the drafting of the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (the "Regulations") which came into force on 30 November last year. The Regulations operate so that trustees cannot process a statutory transfer request and members lose their right to a statutory transfer if one of two statutory conditions are not met. Meeting the conditions as drafted exactly is not necessarily straightforward and two areas in particular have caused problems in practice. These are:
- The "Red flag" that a member has been offered an incentive to make the transfer; and
- The "Amber flag" that there are any overseas investments included in the receiving scheme.
The drafting of both is very wide and many transfers that would have been processed without concern before the Regulations came into force are now caught. Under the Regulations, if a "Red flag" is identified, the statutory transfer right is lost. If an "Amber flag" is identified, the member must be referred for guidance. If the member fails to provide evidence that specified guidance has been taken, it then becomes a "Red flag".
Trustees have been placed in an invidious position. They must either take a pragmatic approach, process the transfer as a discretionary transfer and hope that a member does not later complain to the Pensions Ombudsman that the transfer should never have been made if, for example, the receiving scheme turns out to be a scam or produces poor investment returns. Alternatively, they can decide to block the transfer and risk a finding (and possible fine) that they have denied a statutory right or a challenge to their refusal to grant a discretionary transfer. The Pensions Ombudsman has said that if complaints are made, he must apply the law. Given the Regulations are so clearly worded, there is a risk that the Ombudsman will conclude that trustees do not have the power to make a statutory transfer if one of the above "Red flags" exist.
On 5 July, the DWP and TPR issued a joint Statement in which they said "Where trustees believe the regulations mean there is no statutory right to transfer but they have concluded following due diligence that the transfer is at low risk of a scam, trustees can grant a ‘discretionary transfer’ where scheme rules allow". This is an important clarification from TPR, whose original Guidance said that trustees should not look to circumnavigate the Regulations by making a non-statutory rules-based transfer. The Guidance has been updated accordingly and now reads:
"Your scheme rules may still allow you to make non-statutory transfers even when these risk indicators are present. You should consider the checks in this guidance when assessing whether to grant a non-statutory transfer, but the regulations do not prevent you from making a non-statutory transfer payment where you consider that the transfer is in the member’s interests and does not pose a risk. You should not use non-statutory transfers to avoid carrying out due diligence".
The Statement of course comes in the same week as PensionBee sent a letter to the Minister for Pensions and Financial Inclusion, Guy Opperman, accusing several providers of hiding behind the Regulations to block transfers to the provider, on the basis that its "refer a friend" scheme is an “incentive” under the Regulations.
Pending DWP's formal review of the Regulations, a report on which is due by the end of May next year, it will be interesting to see whether this temporary fix helps. Much of the industry is uncomfortable with a position where a positive decision to allow a transfer needs to be made in circumstances where the law has removed the statutory right. The wording in the guidance goes beyond considering the risk of a scam and suggests the discretionary power is available if the trustees "consider that the transfer is in the member's interests". Reaching such a conclusion may well be challenging given the information actually available to trustees and trustees should take advice. The Pensions Ombudsman is likely to take such guidance into account in any future complaint.
Using a discretionary transfer power
Trustees who wish to use the workaround should seek advice as to whether they have the power to make a non-statutory transfer under their Trust Deed and Rules and, if so, how it operates. Furthermore, trustees should ensure that members who take a non-statutory transfer sign an appropriately written discharge form given that the trustees will not have the benefit of a statutory discharge if they choose to go ahead. Non-statutory transfers should be clearly recorded as such and Trustees should document such cases carefully, including any advice taken.
Where trustees believe the regulations mean there is no statutory right to transfer but they have concluded following due diligence that the transfer is at low risk of a scam, trustees can grant a ‘discretionary transfer’ where scheme rules allow.