Trustees and pension scheme administrators should start preparing now for new regulations designed to reduce pension fraud.
New measures designed to prevent pension fraud will come into effect in June 2022. On 17 January 2022, the UK government announced new requirements for pension schemes to give a “stronger nudge” to encourage their members to take free pensions advice. The intention is that this advice will help protect members from becoming the victims of pension liberation scams. The advice should also help to improve members’ returns by assisting them in making better choices.
Pension liberation scams have been growing year on year for the last 15 years. During the coronavirus pandemic, many pension scheme members were keener to make changes to maximise their pension returns, leaving them more vulnerable to scammers. These scams have been on the government’s radar for several years. PensionWise, the free government guidance service, was set up by the government in 2015. Behavioural trials done by the Money and Pension Service revealed that pension scheme members were more likely to use the PensionWise service if they received a stronger nudge to do so. It is hoped that the new regulations will cut down on scams as a result.
So what do the new regulations require? Under the new regime trustees and managers of occupational pension schemes will have to provide a stronger nudge whenever specific actions by members occur. When a member who is over 50 asks to receive flexible benefits or to transfer all or part of their pension pot, the stronger nudge is triggered. The nudge is triggered whether the request came via communications sent to the trustees or managers, or by way of a formal application. However, the stronger nudge is not triggered if the transfer is for the purpose of consolidating benefits into one scheme, rather than accessing them flexibly.
Once the stronger nudge is triggered, the trustees and managers must direct members to PensionWise and must even take steps to book an appointment for the member with the guidance service. The instruction to access or transfer benefits must not be completed until either an appointment has been booked and attended, or the member has opted out of this service by the member giving an opt-out notification to the trustees or managers. Where a member fails to attend an appointment, subsequent appointments should be booked. Trustees and managers are entitled rely on members to confirm whether they attended their PensionWise appointment or received the guidance. They are not expected to receive proof of their attendance.
An opt-out notice must be provided by trustees or managers separately to the information about PensionWise. If the PensionWise referral information is sent to the member by post, the opt-out notification form must be separate. If communications are being done electronically, the opt-out must form part of a separate email communication.
The Department for Work and Pensions first consulted on its draft regulations in July 2021 and many responses were addressed in the final regulations. Changes were made to cut costs by allowing trustees or managers to give members the PensionWise phone number and instructions on how to book an appointment, when communicating with them online or via post, rather than having to book every appointment.
The final regulations also corrected an error highlighted by consultation responses and will now allow the nudge to be avoided provided that the transferring/receiving scheme has already delivered it.
So why does all of this matter? The stronger nudge requirement will be better for members as it will reduce the risk of their pensions being stolen. It’s also better for employers and trustees who will not have to deal with the complex issues these scams cause.
But compliance with the new regulations will increase scheme administration costs. Employers, who will likely bear these costs, should prepare for this. Effective procedures for schemes to recognise the stronger nudge trigger, deliver the appropriate communications, and keep records of what members have received and whether they have opted out should be prepared well in advance of June 2022. While there is guidance expected from the Pensions Regulator in the coming months, action must be taken to prepare, prior to their publication.