27th November 2023
“The Pensions Ombudsman published an interesting decision last month concerning the Pension Transfer Regulations and the circumstances in which an amber flag is triggered when a member requests a pension transfer to a scheme which includes overseas investments.”
The Pensions Ombudsman has recently published an interesting decision concerning the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (the Pension Transfer Regulations). The regulations introduced a traffic light system designed to assist trustees of pension schemes in combatting pension scams.
Trustees, under the regulations, have to conduct detailed due diligence on receiving schemes when a member wishes to transfer their benefits. If a ‘red flag’ is present the transfer cannot proceed. If an ‘amber flag’ is present, the trustee must direct the member to attend a pension safeguarding appointment with MoneyHelper (a free and impartial government backed advisory service). Once the trustees have seen sufficient evidence of an appointment, the transfer is allowed to proceed.
One of the circumstances in which an ‘amber flag’ will arise is where overseas investments are included in the scheme. The extent of this flag has been a topic of much debate within the industry since the regulations came into effect.
Is the flag triggered where, for example, a receiving scheme invests in the US stock market? The literal answer is ‘yes’. What if the receiving scheme has a global fund the member can choose to invest in?
The Pensions Regulator’s guidance states that “the specific concern here is not whether the investment is in, for example, a global equity fund but whether the investment is in assets or funds where there is a lax, or non-existent, regulatory environment or in jurisdictions which allow opaque corporate structures”. However, Regulator guidance does not take precedence over the Pension Transfer Regulations, and this leaves a tension between the literal interpretation of the regulations versus the more purposive guidance from the Regulator.
The Regulator’s guidance goes on to say that in these circumstances, and after carrying out further due diligence, the trustees “may consider the transfer is at a low risk of a scam and, where your scheme rules allow, [the trustees] may consider granting a discretionary transfer”. However, this feels like an incomplete solution, not least because some schemes do not permit discretionary (or non-statutory) transfers under their rules.
The recent determination of the Pensions Ombudsman considered some of these issues and concluded that a literal interpretation of the Pension Transfer Regulations was not an unreasonable approach for trustees to take.
The case concerned Mr W, a member of the Western Power Pension Scheme, who was asked to attend a MoneyHelper appointment in circumstances where the trustees identified an amber flag because of the possibility of the receiving scheme investing in overseas assets. The receiving scheme was a UK registered pension scheme administered by a UK company and authorised and regulated by the Financial Conduct Authority. Once the initial transfer payment was made into the scheme, it could then be used to invest in global equities.
Mr W’s financial advisor, on behalf of Mr W, argued that there is “an important distinction to be drawn here that whilst the fund may contain shares within companies who are based overseas, the investment is made in the UK, by a regulated pension scheme. It will not hold overseas assets”.
Mr W was given two transfer values prior to him being asked to contact MoneyHelper, the highest of which was £246,580. By the time the transfer was able to proceed, the value had fallen to £227,946.69. The member – perhaps understandably – considered that this drop in value had been caused by the trustees due to the delays arising from their request for Mr W to attend a MoneyHelper appointment.
The Pensions Ombudsman rejected the financial advisor’s argument and found in favour of the trustee stating that, “the trustee was entitled to decide that there were overseas investments in the Receiving Scheme, and its literal interpretation of the Transfer Regulations is not unreasonable”.
The Ombudsman went on to say that, “it is not necessary that the transferring member will, in fact, be invested in any overseas investments”, rather that there are overseas investments included in the receiving scheme.
Whilst it is helpful to know that taking a literal interpretation of the legislation is “not unreasonable”, it does beg the question whether a more purposive interpretation would also have been considered to be “not unreasonable”. It is worth noting that the facts of this case took place around April/May 2022, a time when we understand the waiting time to attend a safeguarding appointment was typically around 2 weeks. Since then, we understand those waiting times have increased significantly, in some cases up to around 4-6 weeks.
As the case highlights, this literal approach to the regulations is likely to continue to lead to delays in the transfer process for some members which could in turn have financial implications for the member. Trustees should try to reduce these risks by dealing with all stages of the transfer process in a timely manner, and, if relevant, asking the member to attend a safeguarding appointment at the earliest possible point.
If trustees require further advice on how to deal with transfer requests from members, or with any other pension-related queries, please feel free to get in touch with Michael Wilcock, or our Pensions team.
Joint Head of Pensions
Joint Head of Pensions