The Government recently unveiled plans to crack down on pension scams by proposing a change to the definition of a statutory transfer. We all understand that members have the right to transfer benefits from one pension scheme to another. Portability of pension rights has been enshrined in law for decades and is something we’re familiar with.
However, the detail of the legal right to transfer is more complicated. The right to transfer applies only to a particular type of scheme – to an occupational pension scheme, a personal pension or an insurance company to buy an annuity.
A scam developed whereby an occupational pension scheme could be set-up through a Small Self-Administered Scheme (SSAS). These are usually bona fide arrangements although they have previously been used as scam vehicles. All you need is a sponsor – which can be a dormant company – and to be HMRC-registered. Scammers can thereby satisfy the legal right to transfer and be free to take steps to rob savers of their pension. This situation came to a head with the infamous Royal London vs Hughes case. Here Royal London was of the strong view that a proposed transfer via a sham SSAS was a scam. They refused the transfer and the case went to the High Court where the judge ruled that, due to his particular interpretation of the definition of an “earner” – basically anyone earning, not necessarily linked to the scheme – the transfer should proceed. This ruling highlighted clear flaws in pensions transfer laws and the Government is now looking to plug that gap.
The new rules specify several new conditions. Firstly, establishing a safe destination list. This includes public sector schemes, FCA registered schemes run by an insurer, authorised master trusts and authorised CDC schemes, of which none exist at present.
This aimed to be a catch all for safe transfers and, whilst a decent effort, misses mainstream providers like AJ Bell and Hargreaves Lansdown. There is also a problem in that some scam activity has occurred via insurance companies who may not always be as secure as expected.
Notably, occupational schemes are off the list. This creates more hoops to jump through in a direct attack on scammers.
Transfers to occupational pension schemes must be able to demonstrate that the member is being paid by the sponsor, through things such as payslips and P60s, and that payments from the employer are being paid into the scheme, which can be evidenced by bank statements and schedules of contributions.
The third condition is for QROPs, where only proof of residency will be needed.
Fourthly, for any other transfer not to an occupational/safe list scheme, the transferring scheme must check for red and amber flags.
Red flags are key scam warnings – no compliance information, wrong permissions, cold calling, incentives, free pension reviews. Amber flags are lesser – high risk investments, high charges, complicated or overseas investments. Here the member will have to undergo a MaPS scam guidance session before transferring.
The key problem is that scammers have evolved. Setting up dormant companies and SSAS arrangements is time consuming and they have found far easier ways to attack members via complex investment arrangements. The safe list needs work. It precludes sensible firms, and most transfers are fine and do not warrant excessive scrutiny. Many remain unreported or unactioned. These rules will reduce, but not solve the current scam problem. They will also create some barriers to bona fide transfers. Many pension schemes and especially third party administration firms do a great deal of due diligence on transfers already to identify where scams could be happening. Essentially, red flags are being checked for and exist and still trustees remain powerless to stop the transfer.
I don’t envy the Government. Fixing the scam issue at point of transfer is incredibly hard. The scammer will already have their teeth into the member and it is very hard to get them to release their grip.
The Government should focus more time on the supply side. Closing websites offering high returns and where scammers hijack legitimate web searches for guidance with offers of free reviews and easy access. This is the breeding ground to stamp on and should be done via the Online Harms Bill.