Living by the code

Whilst this is an area for specialist advice, it is your clients who will be approached to transfer their precious benefits into pension liberation schemes. If the scammers are successful there may be serious financial consequences, not only for the transferring scheme but also the member who transfers benefits and for their family, particularly if the former member then dies or divorces.

The job of pension scheme trustees and managers is to pay benefits to their members as those benefits fall due, but many pension scheme members also have another choice. They can ask those trustees or managers to make a transfer value payment to another pension scheme instead. Ultimately, if the transfer meets the legal requirements then it should be paid. The receiving scheme then has responsibility to pay benefits to the individual, according to its rules, which may since 6 April 2015 for some schemes, mean payment in cash from age 55.

Transfer risks

As long as the legal requirements are met, a scheme which makes a transfer payment should avoid punitive charges and in some cases loss of registered pension scheme status, which would trigger another punitive charge that would impact all members left in the scheme as well as the sponsoring employer.

However, even if a valid transfer is made to a receiving scheme, the member still faces the risk that the receiving scheme then operates in a way that breaks the law and/or the member loses some or all of their benefits. If so, the sanctions on the individual would be:

• losing some or all of their pension benefits transferred;
• if they take benefits before age 55, a tax charge of 40% of the value of the amount transferred; plus
• a surcharge of a further 15% of the value of the amount transferred.

This introduction by some pension schemes and arrangements of the new flexibilities to access benefits is likely to mean an increase in potential incoming transfers to these schemes from schemes which do not offer the flexibilities. Many schemes have seen a huge increase in the number of requests for transfer value quotations as members want to consider their options. It is too early to tell how many of these quotation requests will lead to applications to transfer out.

Trustees and managers have been grappling with the issues where they have concerns around the receiving scheme or arrangement for quite some time, as they try to protect all of their members, and have been calling for clear support in meeting their responsibilities. Now the long-awaited Pension Liberation Industry Group Code of Good Practice on “Combating Pensions Scams” has been published. Although it is not a statutory code, and so does not override regulatory guidance or legislation, it is a welcome addition to the framework of information and guidance in this tricky area. Alongside it, too, sits the statutory requirement for members to prove that they have taken independent financial advice where the payment would be over £30,000.

Practical safeguards

The code sets out three main principles for trustees, managers and pension scheme administrators:

• make members and beneficiaries of their scheme aware of the risks of pension scams;
• have robust but proportionate processes for assessing whether a receiving scheme may be operating as a pension scam and for responding to that risk; and
• be generally aware of the known current scam strategies and use that knowledge to inform what due diligence should be undertaken.

Following the code and recent Pensions Ombudsman’s determinations, the Pensions Regulator has finalised its “Regulatory Guidance on DB to DC Transfers and Conversions”, and issued it in early April.

However, both the code and the regulatory guidance still make it clear that there will be decisions for trustees and managers and, of course, it remains the member’s choice to request that a transfer payment be made if the statutory requirements are met.

The danger of pension scams persists, but hopefully the combination of statute, case law, regulatory guidance and the code should mean that trustees and managers can put the member in a “position to make an informed choice in relation to a valid transfer where there are suspicious circumstances”, with the result that fewer pension scheme members will lose out as a result of pension scams.