Happy Birthday to you, pension transfer rules

November 2023 marks the second anniversary of the pension transfer rules coming into effect, so this feels like a good time to recap them from a paraplanning perspective.

Before we do, we’ll look at the recent back-story and also set the scene for today’s regulatory landscape.

Historic pension rules have long revolved around a concept called the ‘statutory right’. Quite literally, this is the legal right or entitlement the member may have to leave one scheme, taking any assets and cash balances with them to join another. Previously, this existed where the member could demonstrate they were an earner in any capacity.

However, a steady and prolonged rise in the number of pension schemes being targeted by fraudsters, typically via their members and primarily through liberation techniques, led to a discussion about how to combat such practices. One such lever involved lifting what had, over time, become a drastically low bar given that the member’s earnings did not even need to be from the company paying into the pension.

The pension scams consultation of 2016 was born.

Those who fed back into to the consultations and worked with the regulations to get where we are today will feel they are part of the furniture. If you haven’t, fear not. The terrible twos should be behind us and not ahead.

As well as addressing the statutory right which required new primary legislation, two further interventions were announced, one of which I suspect we’re all aware of and the other less so. The ban on pensions cold calling introduced in 2019 was a significant regulatory shift designed to close off the initial contact and sales pitch to unassuming clients, and whilst the other measure involved shoring up the process behind establishing and registering a new pension scheme, those changes didn’t cause anything like the same ripple. Together, and following a further consultation in the Spring of 2021, the rules, known to those of us who work with them often as the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021, were drafted and ratified.

If you haven’t yet interacted with the rules, maybe because you are happy with the providers you currently use or because your focus is financial planning for UK individuals, let me present a snapshot of where we are.

Every pension scheme administrator must carry out a series of checks upon receiving a request to transfer, although those where due diligence has been carried out previously and monitored periodically can be straight-through processed. The extent and complexity of those checks is dependent on the scheme receiving the transfer. SSAS and QROPS are under the strongest lens given that fraudsters have used those products with varying success in the past.

The decision tree essentially offers three pathways which apply to both advised and non-advised transfers. The first condition covers public service schemes, authorised master trusts and the single collective money purchase scheme registered at the time of writing. Everything else is assessed against the second condition which is undoubtedly the broadest brush.

Schemes that are adjudged to present at least one of the triggers, or flags as they’re technically known, must be passed back to the member for further action. One minor flagault requires a Pension Safeguarding appointment with the free guidance service Money Helper upon attending which the transfer should then proceed. One major fault flag and the trustee can refuse the transfer.

Where the transfer request doesn’t meet either of the two conditions, the member doesn’t have a statutory right. It then falls on the scheme administrator to decide if it wants to pursue pathway 3 – a discretionary transfer. Policy on discretionary transfers will differ from scheme to scheme as the trustee’s risk appetite is likely to be the key variable.

You could be forgiven for thinking this is overbearing. However, the practices these measures seek to quell, and the devastating impacts felt by victims they hope to minimise are a strong reminder of the case for them. The recent review carried out by the Department of Work & Pensions announced that 94% of transfers were completed under one of the conditions with no flags present showing that most transfers are taking place without event.

That said, when transferring to a SSAS or internationally to a QROPS, be prepared as you’ll be asked to provide information to supplement the transfer request. The former requires an employment link and the latter a residency link. Essentially, you’re showing the client works for the sponsoring employer or has lived overseas for the three months prior to the request to transfer.

There are some good resources available that add more colour to this piece. The guidance published by The Pension Regulator is a fantastic point of reference as is the Pension Scams Industry Group code of practice, available via The Pensions and Lifetime Savings Association.