Changes to transfer rules and processes will apply from 30 November 2021. Although the introduction of ‘red flag’ and ‘amber flag’ checks has been anticipated for some time, the final regulations have only just been published and are different from the draft regulations in some significant respects.

The new framework is quite complex and will require careful review to assess what changes are required to your current processes. All transfer requests made on or after 30 November will be subject to the new rules.

Action points

Consider urgently what updates are required to:

• member communications about transfer processes (for example, explaining the new rules; and setting out what information the member is being asked to provide and the deadline for response);
• internal transfer due diligence procedures (for example, deciding what forms of evidence you will require in relation to the employment and residency tests);
• arrangements with administrators; and
• privacy/fair processing notices (for example, as to the information being collected and the purpose of processing).

Establish processes to ensure that (a) appropriate information is provided/requested and that reminders are sent at the correct times and (b) all information requested and received is recorded, together with the basis of any decision about proceeding (or not) with the transfer.

The new rules in more detail

The new regulations give trustees greater powers to prevent or pause suspicious transfers. Trustees have only a short window to ensure that their processes are compliant, with requests on or after 30 November being subject to the new rules. The key difference under the new framework is that, even where a member has a statutory transfer right, that right cannot be exercised unless the conditions set out in the new regulations are met. The Pensions Regulator has also published guidance on some practical aspects of the new rules.

Read the regulations and guidance.

In broad terms, the regulations provide the following:

• Proposed transfers to a public service scheme, a master trust or collective DC scheme can proceed as normal. In a change from the draft regulations, all personal pension schemes have now been excluded from this category. Transfers between sections of the same scheme are not included except in the categories mentioned.
• In the case of all other proposed transfers, trustees must check for risk indicators in the form of red or amber flags as outlined below. If trustees have sufficient evidence based on their existing due diligence processes to say that no red or amber flags are present, the transfer can proceed (subject to the next bullet point). Where amber flag indicators are identified, members will have to take scam-specific MoneyHelper guidance from the Money and Pensions Service before they can exercise their right to transfer; where red flags are present, the statutory transfer right will not apply.
• In the case of proposed transfers to other occupational pension schemes or to a QROPS, schemes will need to ask members to demonstrate either an employment link with a proposed receiving occupational scheme (via wage slips, bank statements and other documents), or a residency link if the transfer is to a QROPS. This evidence will then be considered in the context of any other red or amber flags:
  • If the member cannot provide the evidence, or there is concern that the evidence provided is not genuine, this would be considered a scam risk indicator. Some members will be unable to provide the specified evidence for valid reasons – for example, because they are earning below the lower earnings limit or have been in employment for less than three months. These cases will fall into the amber flag group and the member will have to take scam-specific guidance.
  • If the trustees are satisfied with the evidence provided and there are no other red or amber flags, then the intention is that the transfer can proceed. However, if trustees consider that there are other flags even though satisfactory evidence of the employment or residency link has been provided, they can take action to prevent or pause the transfer.

The regulations have been amended to clarify that all evidence in trustees’ possession is relevant and can be considered, including information gained informally or on other transfers, and the omission of information from a member’s formal response. Where trustees request evidence or information, they must require it to be provided directly by the member (except in special circumstances).

The red and amber flags

The flags are divided into ‘substantive’ and ‘procedural’ categories, with differing evidential tests for whether the flag is present (see the table below). If the relevant test is met, then a red flag will prevent the transfer from proceeding. An amber flag means that the member must provide evidence of having taken MoneyHelper guidance (by providing a unique identifier) – if the member cannot do this then the transfer is prevented. The regulations include provision for a member to provide further information and for trustees to reconsider the decision if necessary.

Red flags

Substantive flag (trustees must have reason to believe that the flag is present)

• involvement of an adviser without the proper FCA permissions;
• calling/other unsolicited contact; or
• member has been pressured or offered incentives (including free pension reviews, cashback or early access) to transfer

Procedural flag (trustees must be satisfied beyond reasonable doubt that the flag is present)

• member fails to provide a substantive response to a request for information; or
• member fails to provide evidence of taking MoneyHelper guidance

Amber flags

Substantive flag (trustees must have reason to believe that the flag is present)

• evidence is not genuine or not provided directly by the member;
• the member’s evidence fails to demonstrate the employment or residency link; or
• in relation to the receiving scheme and based where relevant on the trustees’ judgement and knowledge, any of the following is present:
• high-risk or unregulated investments;
• unclear or high fees;
• unclear/complex or unorthodox investment structure;
• inclusion of overseas investments; or
• a ‘sharp or unusual’ rise in the volume of transfer requests involving the same scheme or adviser

Procedural flag (trustees must be satisfied beyond reasonable doubt that the flag is present)

• member provides an incomplete response to a request for information

Communications and timing

• The regulations also mandate certain communications and timings which should be built into your updated processes, including the following:
• Notification of the new checks must be provided within one month of a request for a CETV/transfer (unless the transfer is made within one month).
• Where one of the conditions for a transfer is met, this must be confirmed to the member no later than the date on which it is confirmed that the transfer has been made.
• Where a member has been asked for information and has not provided it, a further request must be sent after at least one month has passed; if a further month passes with no response, trustees may determine that the red flag shown in the table above is present. If the member provides incomplete information, a further request must be sent for the missing information and trustees may determine that the relevant amber flag is present after a further month. Note that TPR’s guidance suggests that two reminder letters should be sent, each a month after the previous contact.
• Where trustees decide that a red flag is present, such that the member has lost their statutory transfer right in respect of that transfer request, they must inform the member within seven working days.

The industry code of conduct on transfers (produced by PSIG) will be updated to reflect the new rules. The government’s response to the consultation on these changes is also available.

The new rules are quite prescriptive in places (for example, as to what information is required for the employment test) but flexible in others (a number of the amber flags are left to trustees’ own knowledge and judgement of market practice etc). All schemes will need to act quickly to update and implement new processes – please contact your usual Allen & Overy adviser if you need help or training with this. Trustees will also need to be clear in the next few months whether they are dealing with a pre-30 November transfer request or one that falls within scope of the new regime.