By Fiona Tait, Technical Director, Intelligent Pensions
Which is better, to improve safety and restrict choice, or to allow flexibility and accept the risks?
Why have a statutory right to transfer?
Prior to 1975 employers were not obliged to preserve the pension benefits of early leavers from an occupational scheme in any way. Their funds often ended up as a windfall for the scheme and the member effectively lost some of the full remuneration package they were otherwise entitled to.
The legal right to transfer these preserved benefits was not introduced until 10 years later via the Social Security Act 1985 (SSA85), under the aegis of a conservative government which advocated individual enterprise and who went on to invent the Self-Invested Personal Pension (SIPP) plan within the next 5 years. The intention was that transferring instead of leaving their frozen pension with the employer’s scheme would allow people more investment choice and the flexibility to decide when they wanted to retire.
The question is, now that we have the ultimate freedom and choice for people to do what they like with their pensions once they reach the age of 55, does this justify revoking the transfer rights that were considered so positive thirty years ago?
Existing protections
There are protections built in. Not every member has the right to transfer and the scheme trustees have to ensure that certain conditions are met regarding the receiving arrangement, leaving them in the position where they are expected to carry out due diligence on the receiving scheme, while at the same time meeting the statutory requirement to transfer within the six-month deadline.
To meet the requirements for a statutory right for a transfer, the benefits must be used to provide “transfer credits” within a registered personal pension or occupational scheme and it is the latter which has been most often challenged. In order to qualify, an occupational scheme must be one which was established “for the purpose of providing benefits to a person to whom section 1(2) of the Pension Schemes Act 1993 applied when the scheme was established”, i.e. someone who is an employee of the sponsoring company.
This condition was intended to stop transfers into occupational schemes which were established with the primary intention of investing in a likely scam. However, the case of Hughes v Royal London (2016) subsequently showed that where it is possible to demonstrate “earnings” the condition has been met and trustees cannot block a transfer in these circumstances, even when the due diligence turns up concerns about the nature of the receiving scheme.
Consultation
In 2017 the Treasury (HMT) issued a consultation into pension scams in 2017 covering proposals for a cold-calling ban and limiting the statutory right to a transfer. The proposals received overwhelming support and HMT announced that it would proceed with proposals to limit the statutory right to a transfer to arrangements where:
• The personal pension scheme is operated by a firm authorised by the Financial Conduct Authority (FCA)
• It is an authorised Master Trust scheme
• A genuine employment link to the receiving occupational pension scheme could be evidenced by the member, for example via regular wage-slips or dividend statements.
Despite this, only the cold-calling ban has subsequently reached the stage of legislation, and some commentators do not think it has gone far enough. Calls for an approved list of receiving schemes have been made, as have suggestions of banning transfers into all Small Self-Administered Schemes (SSAS) and/or reviving the role of the pensioneer trustee.
What’s changed
The approved implementation of the pension dashboard has sparked concerns that it might make it easier for scammers to access people’s pension details and target them as a result. At the same time complaints against SIPPs continue, with scams leading to risky and unsuitable investments showing that the problem is certainly not confined to occupational schemes.
Conclusion
Clearly we are in legislative shut down at the moment and I am not convinced in any case that legislation is the answer. Transfers can still result in greater choice and flexibility for scheme leavers, providing they are conducted properly. People should have the right, in the majority of circumstances, to control the pension savings which they have accrued.
I would however, be in favour of a much stricter set of rules for receiving schemes which trustees could use, if not an actual approved list. The Pensions Regulator has recently rolled out the authorisation process for Master Trusts, proving both that it can be done and that it would be a very big exercise.
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