Out-Law News | 08 Jul 2022 | 3:13 pm | 2 min. read
New guidance on due diligence checks on pension transfers issued by the UK’s Pensions Regulator (TPR) reflects a “growing sense of unease in the industry” that the guidelines do not strictly reflect the statutory requirements, according to one legal expert.
In updated guidance, TPR said pension schemes still had to carry out due diligence checks on statutory transfers – and refuse them when they showed certain risk factors – but added that a scheme’s rules may allow it “to make non-statutory transfers even when these risk indicators are present.” It added: “Our expectation is that trustees will carry out enough due diligence on a non-statutory transfer to be confident that they have fulfilled their fiduciary duties to the transferring member.”
It comes after criticism over TPR’s interpretation of the ‘red’ and ‘amber’ flag system set out in regulations. Some pension providers had complained that the ‘incentives’ red flag, triggered when evidence suggests that a member receives a payment for making a transfer, unintentionally caught small-scale cash payments made by legitimate operators in the market. Updated guidance on this makes clear that some incentives “could be considered normal industry practices” and tells trustees that they can “consider granting a discretionary transfer” if their scheme rules allow and the transfer has “a low risk of a scam”.
The regulations have certainly achieved their objective of making it much easier to spot and avoid scam transfer activity, but they have also inadvertently thrown up a few problems when dealing with what should be straightforward transfers
Ben Fairhead of Pinsent Masons said: “The change to the guidance reflects a growing unease in the industry around how, in particular, the ‘incentives’ red flag operates under the regulations. The government may not have meant to catch small-scale cash payments made by legitimate operators in the market, but the reality is that the definition does capture them – as well as potentially many other non-scam incentives besides.”
TPR also updated its guidance on a separate amber flag which is triggered when overseas investments are included in a scheme. The regulator said the target of that flag “is not whether the investment is in…a global equity fund”, but whether it is in “assets or funds where there is a lax, or non-existent, regulatory environment.” The new guidance tells trustees and managers that, where their scheme rules allow, they can consider granting a discretionary transfer despite the inclusion of overseas investments when the risk of a scam is low.
Fairhead said: “The regulator’s shift in focus to proposing a discretionary transfer as a means of working around this problem might work in some circumstances, but trustees really will need to consider the position carefully and make sure adequate protections are in place – and take advice if necessary. This might be no more than a sticking plaster as the regulations will inevitably need some amendment in due course.”
“Despite the strong policy statements around intention, there remains a disconnect between that and the literal reading of some parts of the regulations. They have certainly achieved their objective of making it much easier to spot and avoid scam transfer activity, but they have also inadvertently thrown up a few problems when dealing with what should be straightforward transfers,” Fairhead said.
He added: “There is no question of anyone abusing the regulations – no one wants to see legitimate transfers grinding to a halt – but there are going to be risks involved in simply proceeding with transfers that have, strictly speaking, given rise to red or amber flags. Unintentionally, these problems could open the door to what would be, to all intents and purposes, mischief-making complaints and claims in years to come. These are genuine concerns, and I don’t think, in that context, trustees can fairly be criticised for exercising some caution.”
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