New Guidance from the Regulator on how to halt suspicious transfers

The Pensions Regulator (TPR) has published a new Guidance for trustees, pension managers and administrators on checking, proceeding with and refusing transfer requests from scheme members.

From  30 November 2021, as part of the due diligence process for transfer requests, both trustees and scheme managers have the duty to make specific checks before dealing with transfers.  The checks to be carried out will determine which conditions apply to the transfer and whether a statutory transfer can proceed.

First condition: The receiving scheme is listed in the transfer regulations

Is the receiving scheme one of the following?:

• a public service pension scheme (schemes established by a public authority for civil servants, armed forces, health service workers, teachers, judiciary, police, firefighters and local government workers)

• an authorised master trust on TPR’s published list

• a collective defined contribution (CDC) scheme that has obtained authorisation and is included on the list which TPR will publish

If, beyond reasonable doubt, the receiving scheme is one of those listed above, the transfer can proceed without any further checks.

The member must receive confirmation that the receiving scheme is one of the types described above no later than the date at which it is confirmed to the member that the transfer has been made.

Second condition: Check for an employment link, overseas residency and red and amber flags

Where the receiving scheme is not one of those described in the first condition, it must be considered whether the second condition is met. This may require further checks to assess the level of risk to the member. It may be the case that, from previous checks on the receiving scheme, it is concluded that the transfer is low risk and therefore the second condition is met.

The table below lists the red and amber flags mentioned in the Guidance:

The Guidance contains useful paragraphs on:

1- how to collect relevant information;
2- how to carry out due diligence;
3- how to direct members to mandatory guidance from MoneyHelper; and
4- when to refuse a transfer.

The Guidance also includes this helpful "Transfer process decision" tree to aid decision-making on the various checks.

Source: The Pensions Regulator – Guidance on Dealing with transfer requests (Appendix 1)

PASA GMPE Anti-franking Guidance

To add some complexity to the already challenging GMPE, there is also the anti-franking test to consider.

What is anti-franking?

The purpose of anti-franking is to ensure that, except in limited circumstances, the revaluation applied to GMPs in deferment cannot be offset against a member’s other benefits. 

Anti-franking applies directly to members who leave before normal pension age and then retire at normal pension age, and to members who leave active service at or over normal pension age (subject to certain additional conditions set out in the Pension Schemes Act 1993). However, the preservation requirements for members taking early or late retirement to receive benefits at least equal in value to those they would have received had they retired at normal pension age means it may have an indirect effect on other members as well.

Where anti-franking applies, an “anti-franking minimum pension” underpins the member’s scheme pension and this can result in pensions in payment being “stepped up” when a member reaches their GMP age (60 for women; 65 for men), or at retirement when a member remains in active pensionable service after their GMP age.

It is unusual for scheme rules to prescribe how anti-franking tests should be applied and this has resulted in different techniques being used. A scheme’s past practice will usually dictate how anti-franking will be approached for the purposes of equalisation.

PASA’s approach

In September this year, PASA published their Anti-franking Guidance which aims to help trustees to understand how anti-franking should be applied for equalisation purposes.

The Guidance describes  three  potential techniques for applying anti-franking in the GMPE project:

1-    Ring-fence (90-97) Technique

This technique was already set up in September 2021 by the PASA Methodology Guidance and, as its name suggests, it “ring-fences” 90-97 benefits.

In summary, this technique (i) complies with legislation and applies the anti-franking test to the member's whole (unequalised) benefit at the member's GMP Age or later date of retirement and (ii) compares member’s benefits which would have been payable for service in the period between 1990 and 1997 to the comparator in respect of the same period. If the comparison shows that the comparator would have had a higher benefit, then the member would be entitled to receive the uplift.

This technique requires schemes to hold three different pension streams (whole pension for true sex, true 90-97 and comparator 90-97).

2-    DWP 2012 (Whole of Service Mixed Sex) Technique

In summary, this technique (i) complies with legislation and applies the anti-franking test to the member's whole (unequalised) benefit at the member's GMP Age or later date of retirement and (ii) compares this total pension to a pension calculated as follows:

-       The Pre90 element consists of the member's pension

-       The Post90 element consists of the opposite sex's pension

-       The anti-franking minimum at each age consists of the sum of the following components:

▪ The Pre90 minimum for the true sex. This will always include the member’s Pre90 pension at cessation date, and any applicable increase in Pre90 excess pension, but will only include increases on Pre90 GMP if the true sex has reached GMP age

▪ The Post90 minimum for the opposite sex. This will always include the comparator’s Post90 pension at cessation date, and any applicable increase in Post90 excess pension, but will only include increases on Post90 GMP if the comparator has reached GMP age.

3-    Apportionment (Whole of Service Pure Sex) Technique

As explained in the Guidance, this technique:

• complies with legislation and applies the anti-franking test to the member's whole (unequalised) benefit at the member's GMP Age or later date of retirement;

• applies the anti-franking test to the opposite comparator's whole benefit (including Pre90 pension) at the comparator's GMP age or later date of retirement;

• pro-rates the anti-franking step-ups in an appropriate manner for the 90-97 period only; and

• compares the benefit for a member relating to 90-97 service only, with the member's step-up calculated in the previous step, with that for the equivalent pension for the comparator and, if the comparator would have a higher benefit, then an uplift will need to be provided to the member.

This method requires four streams (whole pension for true sex, true 90-97, whole pension for comparator sex and comparator 90-97).

Clearly, whatever technique will be used there will be an amount of data to collect and some calculations to perform and therefore it is recommended for all schemes to liaise with their pension administrator to discuss different options and outcomes.

PASA - GMPE Transfer Payments Guidance

The purpose of this Guidance published in August 2021 is to assist pension schemes and their advisers to equalise historic transfers and is divided in the following three sections:

1-role of transferring schemes in individual transfers;

2-role of receiving schemes in individual transfers; and

3-bulk transfers.

Role of transferring schemes in individual transfers

Transferring pension schemes may be required to pay a top up payment in respect of former members who had service between 17 May 1990 and 5 April 1997 (the Equalised Period) and transferred out. This would happen if the amount that was transferred would have been higher if GMP was equalised at the time the member transferred out.

The two points raised by PASA Guidance here are that (i) there is no statutory limitation period and therefore all historic transfers out which cover periods of pensionable service in the Equalised Period can theoretically be entitled to receive a top up payment and (ii) trustees need to be proactive when determining what to do in cases of historic transfers and transferring schemes need to take advice. Inevitably, there will be situations where the transferring schemes will be unable to discharge their liability for top up payments and will have to retain this liability.

PASA Guidance contains the following table which illustrates the necessary steps the transferring schemes have to undertake to discharge their liability and when this is not possible.

Role of receiving schemes in individual transfers

While the Guidance provides a step-by-step approach to transferring schemes dealing with historic transfers, it does not help in the same way for receiving schemes and, as the legal obligations remain uncertain, it suggests receiving schemes should seek legal advice.

In summary, from the Lloyds case, it appears that there is an obligation to comply with the Coloroll case which says that it is the receiving scheme that is required to make the top up payment if requested. If the receiving scheme is a DB scheme, it is expected that the scheme equalises the GMP awarded in respect of the transfer as part of its wider GMP equalisation exercise. However, if, instead, the receiving scheme is a DC scheme, it is likely that the top up payment will be offered by the transferring scheme and it is expected that the receiving DC scheme will accept the payment subject to a minimum level and with member consent.

Bulk transfers

Based on the Lloyds judgments, often the transferring schemes have no obligation to make top up payment to equalise benefits on bulk transfers and it is normally the receiving schemes that are expected to assume an obligation to equalise the correct GMP inequalities. It is essential for schemes to review the bulk transfer legal agreements to ascertain who may be liable to implement the GMP equalisation.

More clarity on GMPE– New PASA Guidance on member communications

It has been three years since the Lloyds case which required schemes to equalise for the effect of GMP. These three years have been characterised by uncertainties on how to undertake this project.

The Pensions Administration Standards Association (PASA), following Lloyds case number 1 in 2018, has set up working groups to help schemes with GMPE and in the last few months issued three new important pieces of guidance on member communications, historic transfer and antifranking.

PASA GMPE communications Guidance

One of the biggest challenges of GMPE is how to communicate something quite technical to schemes’ members in a simple and clear way.

In August 2020, PASA published the GMP Communications Guidance - Early Planning Stage guidance where, in summary, it set up:

• how to approach communications;

• some broad principles for communicating GMPE;

• a useful Do’s and Don’ts section;

• some practical things that schemes can do;

• a ‘questions and answers for members’ section; and

• a communication checklist to help schemes make sure all relevant documents are gathered and reviewed.

In September 2021, one year on from the Early Planning Stage guidance, PASA published the GMP Communications – Implementation Stage guidance designed to help schemes during the implementation stage of their GMPE journey.

This guidance:

• contains the important principles for communicating (i.e. layering information, using different channels, providing only the information needed, avoiding jargon, involving others and being trustworthy);

• puts the individual at the centre of what pensions schemes should do when drafting communications and encourage pension professionals to take a step back when it comes to communications and put themselves in non-pensions people’s shoes;

• shows how to effectively time communications to members and consider legal requirements for informing members, the relevant timing, the expectations for future communications and when to communicate about past transfer values;

• considers the different categories of members and what are the different messages to send across, including useful examples;

• provides a checklist for planning the data to use in communications; and

• also includes the communication checklist to help schemes to make sure all relevant documents are gathered and reviewed (checklist which is also included in the 2020 PASA Early Planning Stage guidance).

The two main messages the Guidance seems to put forward are that schemes must (i) plan efficiently their communications to members allowing sufficient time to plan and check everything and (ii) keep communications effective and simple.

New Guidance from the Regulator on how to halt suspicious transfers

TPR has just published a Guidance for trustees, pension managers and administrators on checking, proceeding with and refusing transfer requests from scheme members.

There are certain circumstances where a statutory transfer cannot proceed (red flags) or may proceed (amber flags).

The Guidance contains useful paragraphs on:

1- how to collect relevant information;
2- hot to carry out due diligence;
3- how to direct members to mandatory guidance from MoneyHelper; and
4- when to refuse a transfer.

The Guidance also includes this helpful "Transfer process decision" tree to halt suspicious transfers, where the condition one is that the receiving scheme is listed in the transfer regulations.

New requirements for the Chair’s Statement

The DWP has published new guidance for trustees of occupational defined contribution pension schemes (‘relevant schemes’) which came into effect on 1 October 2021 .

The publication sets out the following requirements and guidance for trustees:

1.    Return on investments:

Calculate and state the return on investments from their default and self-select funds, net of transaction costs and charges. This information must be recorded in the annual chair’s statement from the first scheme year ending after 1 October 2021 and published on a publicly accessible website.  Trustees are expected to include - as a minimum - the net return for the scheme year, although the Government is recommending that figures for net investment returns should also be shown dating back at least five years, or even 10, 15 or 20 years, if the data is available.

The additional disclosure is intended to help members understand how their investments are performing as well as enable trustees to carry out the new detailed value for members assessment (see below).

2.    More detail for the ‘Value for Members’ (VfM) assessment

For the first scheme year that ends after 31 December 2021, and at intervals of no more than one year thereafter, trustees of relevant schemes with under £100 million of total assets must carry out a more detailed assessment of how their scheme delivers value for members. The assessment must include a comparison of reported costs and charges and fund investment (performance) net returns against three other schemes, and a self-assessment of scheme governance and administration criteria. 

a.    The costs and charges and fund investment (performance) comparison:

The guidance states that “comparator schemes” should be:

o   an occupational pension scheme which on the relevant date (the date on which the trustees obtained audited accounts for the scheme year that ended most recently) held total assets equal to or greater than £100 million; or

o   a personal pension scheme, which is not an investment-regulated pension scheme; and

o   include a scheme that is different in structure to their own, where possible. For example, schemes not used for automatic enrolment should not limit their comparison to other such schemes.

When selecting the three comparator schemes the Regulations also require that trustees “have had discussions” with at least one of the comparator schemes about a transfer of the member’s rights in the event that the scheme may decide to wind-up (for instance because the trustees conclude that it doesn’t provide good value for members).  The Government suggests that the trustees might find TPR’s list of authorised master trust schemes useful for this requirement.

b.    Self-assessment for Administration and Governance

There are 7 key metrics that must be considered and assessed:

(i)            Promptness and accuracy of core financial transactions

(ii)           Quality of Record Keeping

(iii)          Appropriateness of the default investment strategy

(iv)          Quality of Investment Governance

(v)           Level of trustee knowledge, understanding and skills to operate the pension scheme effectively

(vi)          Quality of communication with scheme members

(vii)         Effectiveness of management of conflicts of interest

The VfM assessment must be reported in the annual chair’s statement and published on a publicly accessible website, as well as be reported to the Pension Regulator (TPR) via the annual scheme return.

Trustees of relevant schemes with total assets of £100 million or greater must continue to assess and explain how the costs and charges of their scheme generally represent value for members in their chair’s statement.

3.    Schemes in wind-up

Trustees of specified schemes will not be required to carry out the value for member assessment or report its outcome, provided they have notified TPR before the date by which they are required to prepare a chair’s statement. Trustees must however explain in the annual chair’s statement that wind-up is the reason why they are not complying with this duty.  All other requirements for the chair’s statement continue to apply, i.e. trustees are still obliged to assess whether their costs and charges offer good value to members up until the point that wind up of the scheme is completed.

4.    Action following the VfM assessment

 If, having completed the assessment the trustees have concluded that the scheme does not provide value for members, the Government expects the trustees to look to wind up the scheme and transfer the rights of their members into a larger occupational pension scheme or personal pension scheme, or set out the immediate action they will take to make improvements to the existing scheme.  The Government also states that if improvements (where applicable) are not made within a reasonable period - for example within the next scheme year - then trustees will be expected to wind up and transfer members benefits to another scheme.

Draft provisions for implementation of increased normal minimum pensions age

Members of pension schemes are not usually able to access their pension savings before the normal minimum pension age (NMPA).

The government is proposing to increase the NMPA from 55 to 57 with effect from 6 April 2028. 

After this date the consultation said it might be possible for members protect the right to access pensions below the age of 57 (protected pension age or “PPA”) if:

·         On 5 April 2023, the member had an unqualified actual or prospective right under the scheme to a benefit from an age less than 57;

·         The scheme rules on 11 February 2021 included such a right for some or all of the members on that date; and

·         The member had that right on 11 February 2021 or would have done had they been a member on that date.

HMRC is expected to issue guidance on what an unqualified right to draw benefit before age 57 means in practice. Broadly it would be a right under which individuals do not need the consent of any other person (such as an employer or trustee) before they can take their benefits at a particular age.

Note that in its response to the consultation, the Government is allowing a small window of opportunity for individuals to protect a pension age of 55.  If an individual joins a pension scheme, by 5 April 2023, with rules that on 11 February 2021 already confer an unqualified right to take pension benefits below age 57, then that individual will also have the same PPA as other members in that scheme.

The legislation will be introduced in the Finance Bill 2021-22.

Proposed timetable for the Pensions Dashboard

The Pensions Dashboard Programme has published a proposed timetable by which pension providers will be required to connect to, and make pension information available to savers through, the dashboard.  

It is proposed that the largest schemes will provide the information first (1,000+ memberships), then the medium schemes (100 to 999 memberships) and finally the small and micro schemes (99 or less memberships).

The largest schemes will start in April 2023 and this first stage could last up to two years.  The second stage will not commence until the bulk of large schemes have been successfully completed (this would be unlikely to be before 2024).  Timing for the third stage is yet to be determined.

The consultation closes on 9 July 2021, after which, the staging will be mandated for occupational pension schemes through DWP regulations.  Those regulations are expected to be consulted on by the end of 2021 and to be laid before Parliament in summer 2022.