This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
A new voluntary code of practice has been issued which sets out "industry standard due diligence" which trustees, providers and administrators (collectively referred to in this article as "trustees") should follow when dealing with pension transfer requests. It sits beside the existing legal and regulatory framework, including the requirement for members transferring from DB to DC schemes to take regulated advice (for transfers over £30,000).
The code follows on from the Pensions Ombudsman determinations earlier this year, which placed a high standard of due diligence and understanding of scheme documents and legislation on trustees when requested by a member to make a transfer payment. The code highlights, but does not resolve, the difficulty for trustees where they believe that a scam is being committed but the member appears to have a legal right to demand the transfer.
The code includes steps trustees should take including sample letters, standard information to request, additional information to consider when the transfer request is to a SIPP, SSAS or QROPS and how to report suspicious cases. It also includes checklists for recording the process and decisions made.
The code has three main principles:
- Trustees should raise awareness of pension scams amongst members and beneficiaries in their scheme.
- Trustees should have robust, but proportionate, processes for assessing whether a receiving scheme may be operating as part of a pension scam, and for responding to that risk.
- Trustees should generally be aware of the known current strategies of perpetrators of pension scams in order to inform their due diligence. They should refer to the Pension Regulator’s warning flags, FCA alerts and Action Fraud guidance.
|How to spot a scam - some key risk indicators |
- Newly established scheme with little or nodocumentation
- First contact with member made through cold calling or unsolicited text or email
- Pressure to force through the transfer
- Promise of high or guaranteed returns
- Encouragement to take cash and revinvest it
- Claims toallow access to pension before age 55
- Transfers ofmoney overseas
Key to the code is that trustees should conduct proper due diligence when dealing with a transfer request and carefully consider whether the transfer can and should proceed. Appropriate due diligence will vary but the code sets out in detail information which may be appropriate.
The first step on receiving a transfer application should be for the trustees to do an initial risk assessment on the receiving scheme, having obtained its name and HMRC registration number from the member. If there is no real risk (e.g. the transfer is to a public sector scheme or a scheme already cleared by the trustees as being not at risk) then the rest of the code falls away and the transfer should progress on the usual basis. But if the receiving scheme does not pass the initial analysis then the member should be asked the following questions.
|Basic questions for members |
- Will you be receiving any cash payment, bonus, commission or loan from the receiving scheme?
- Did the receiving scheme or sales agent contact you first(e.g. a cold call)?
- Have you been told that you can access any part of your pension fund under the receiving scheme before age 55, other than on the grounds of ill-health?
- Have you been told that you will be able to draw a higher tax free cash sum as a result of transferring?
- Have you been promised a specific or guaranteed rate of return?
- Have you been informed of an overseas investment opportunity?
If the answer to any of these questions is yes then the trustees should go on to obtain additional information and do further due diligence.
|Suggested due diligence information |
- Legal status and location of receiving scheme and any administrators or operators
- Employment link between receiving scheme and member
- Provenance of thereceiving scheme e.g. check Companies House, FCA, HMRC, National Crime Agency
- In assessing the receiving scheme the following factors should be considered
Note: The transfer should be processed quickly and efficiently where there is considered not to be a material risk
Where there is a material risk, the trustees should check whether the member nevertheless has a legal right to transfer. This may require advice. If the member does have a right to transfer then trustees will need to decide whether or not to proceed despite the risk. This may also involve taking advice. If the transfer is not to proceed the trustees should write to the member giving reasons why. Where appropriate, the circumstances should be reported to Action Fraud and the Pensions Regulator.
If the member supplies sufficient additional information satisfying the trustees’ concerns then a transfer could take place. Where a decision to transfer takes place, despite concerns, then trustees should ensure they have a suitably robust discharge – although this cannot eliminate all risk of a claim against them.
Trustees should keep records of schemes vetted and record their decisions.
Ultimately, where the member has a legal right to transfer (and the trustees are satisfied of this, having carried out due diligence on the receiving scheme) the transfer should be made.