The DWP and HM Treasury are consulting on three proposals to combat pension scams. Two proposals – banning cold calls about pensions and requiring that only active (rather than dormant) companies may establish schemes – are unlikely to have significant impact on occupational schemes. However, the third proposal – changing statutory transfer rights – is worth considering in more detail from an occupational scheme's perspective.
Transfer rights: what is proposed?
Under the proposals, a member would only have a statutory right to transfer where the receiving scheme is:
- a personal pension scheme operated by a person authorised by the Financial Conduct Authority (FCA);
- an authorised master trust; or.
an occupational pension scheme (other than an authorised master trust) where a "genuine employment link" to the receiving scheme can be demonstrated.
To satisfy the "genuine employment link" requirement, evidence of regular earnings should be given, as well as confirmation that the member's employer has agreed to participate in the receiving scheme.
The proposed change arises out of the issue highlighted in the Hughes v Royal London case, which confirmed that the current requirement for a transferring member to be an "earner" does not mean that the member must have earnings from an employer participating in the receiving scheme. As long as the member has earnings (from any source), the current statutory test is satisfied and trustees are not justified in refusing a transfer.
The proposed change seeks to close this loophole and is therefore welcome. However, it also gives rise to concerns:
- What evidence would be required to demonstrate a "genuine earnings link"? Would the onus to provide this evidence fall on the transferring member?
- In supplying proof of earnings, would members be expected to show employment contracts or payslips to the pension administrators of their former employer (which could breach confidentiality obligations to their new employer)?
What about members on zero-hours contracts (who may not have regular earnings)?.
- If a member wishes to transfer benefits to a former employer's scheme, would evidence of previous (rather than current) earnings be sufficient?
As an alternative to restricting members' statutory transfer rights, the consultation suggests "insistent" members could be required to sign a declaration that they had understood the scam warnings they had received and which limited the member's recourse to the trustees should the receiving scheme turn out to be a scam.
A further suggested approach is to introduce a "cooling off " period under which the transferring scheme would delay transfers, for example by two weeks, to allow members to reconsider their decision.
It is good practice for trustees to ask all transferring members to sign a discharge form before paying the transfer out – but they cannot insist on this where the member has a statutory right to transfer. As trustees do not see the contents of the member's independent financial advice, how they could distinguish an "insistent" member wanting to transfer despite advice against it, from a "non-insistent" member transferring in line with advice, is unclear. Enabling trustees to require members to sign a discharge in all cases would therefore be helpful.
As trustees already have up to six months to complete a transfer and can legitimately delay a transfer where they have concerns, we do not consider that a cooling off period of two weeks would make scams any less likely to succeed.
If a member does not have a statutory right to a transfer (because the "genuine earnings link" requirement is not met), s/he may still be able to transfer out under a non-statutory transfer power in the scheme rules. In many cases, scheme transfer rules give trustees e discretion whether or not to consent to the transfer. Where trustees have discretion, they may choose to make their consent subject to various conditions, such as the member signing an appropriate discharge form and the trustees being satisfied the receiving scheme is genuine.
It is less common for members to have an absolute right to transfer – but where they do the trustees may not make the transfer subject to conditions.
The consultation asks how the process for non-statutory transfers would change under the proposals.
If members' statutory transfer rights are restricted, focus will turn more to their rights under the scheme rules. Unfortunately, the consultation paper does not consider scheme transfer rules which do not require trustee consent.
Where a scheme transfer rule is subject to trustee discretion, we do not believe that changes will be necessary. However we suggest that, where members currently have an absolute right to transfer, a statutory override enabling a rule amendment to include a requirement for trustee consent would be helpful.
We are working with industry bodies to ensure these points are made to the DWP/HMT.