Pension transfers to schemes other than master trusts, CDCs, insurers and funded public sector schemes will only be permitted if strict new anti-scam procedures are followed, under controversial draft rules published today.
A DWP consultation published today proposes introduce a four step process. Step 1 requires trustees and scheme managers to ask whether the member moving to a ‘safe destination’ scheme. These schemes will include master trusts, collective defined contribution (CDC) schemes, funded public sector pension schemes and pension schemes operated by insurance companies.
If the answer is no, the second step asks the individual to demonstrate an ‘employment link’ to an occupational pension scheme receiving the transfer, or a ‘residence link’ where they are moving to an overseas pension scheme called a QROPS.
Prospective transferees failing this qualification move to the third step, which requires the pension scheme the person is transferring from to assess whether to contact the member and ask them a list of set questions to identify whether any ‘red’ or ‘amber’ flags are associated with the transfer. This assessment will be based on the pension provider’s knowledge of the receiving scheme and the perceived risk of there being a scam involved. Only once the member has responded to these questions in a satisfactory manner can the transfer go ahead.
If a red flag is highlighted by the answers and/or by wider due diligence, the transfer will not be allowed to proceed. If an amber flag is highlighted by the answers and/or by wider due diligence then the pension scheme has to tell the individual to make an appointment to speak with Government-backed guidance service Pension Wise, and obtain evidence that they have spoken to Pension Wise, before the transfer can go ahead. If the individual refuses to speak with Pension Wise, they cannot make the transfer.
AJ Bell CEO Andy Bell argues that the proposals risk blocking or delaying thousands of legitimate transfers. He argues DWP could see providers asking people transferring to a pension scheme not on a prescribed ‘safe destination’ list a series of questions to determine whether they are at risk of being scammed. Bells says the proposal to exclude all Sipps and personal pensions not operated by insurance companies from the safe destination list means transfers to these schemes could face severe and unwarranted delays.
But third party administrators and master trusts have welcomed the proposals.
Bell says: “Tackling financial fraud is one of the most significant challenges facing the industry today and we have campaigned tirelessly for vital reforms, including the pensions cold-calling ban. However, it is crucial in designing any protections for savers that the cure is not worse than the disease.
“Unfortunately, that is a real risk with the DWP’s proposed reforms, which could require savers to satisfactorily answer a set of questions before they are allowed to transfer their pension unless they are moving their fund to a ‘safe destination’ scheme.
“Classifying insured pension schemes as a safe destination, whilst excluding platform pensions is arbitrary. The thinking that all insured schemes are inherently safe shows the Government has forgotten the Equitable Life scandal.
“Whether or not the ‘red’ and ‘amber’ flag questions are asked will be at the discretion of the provider the person is transferring away from. Whilst it is positive that firms are encouraged to use existing intelligence to decide whether to ask these questions, some firms will undoubtedly take a risk averse approach and ask them on all non-safe destination transfers.
“If providers take a blanket approach and ask these questions of all transfers to schemes not on the safe destination list, pension transfers could be pushed back into the dark ages.
“That would be ludicrous, could cause serious consumer detriment and needs to be urgently rethought.”
Hymans Robertson TPA head of clients Peter Summers says: “We welcome today’s consultation on combatting Pensions Scams from the Department of Work and Pensions. We firmly believe that anything that can further protect pension scheme members from scams, and the corresponding physical and emotional fallout, can only be a positive thing. We remain cautiously optimistic on the consultation and look forward to reviewing further details on the proposed legislation as it emerges.”
Phil Brown, director of policy at B&CE, provider of The People’s Pension, said: “We welcome the Government’s consultation on introducing a red flag system for pension transfers, a move that would give the industry greater powers to tackle pension fraud, which is the cruellest of all financial crimes. Legislation on this issue was one of the steps we recommended in the research with the Police Foundation which we published last autumn, with its findings discussed at a subsequent Parliamentary inquiry into pension fraud.”
Broadstone technical director David Brooks says: “We have been waiting for the tools to help prevent pension scams and, unfortunately, the Government’s first effort to provide them to trustees and providers risks putting members at risk in a confused set of conditions.
“A safe list is to be produced, which we expect will cover the vast majority of transfers, where any subsequent concerns about transfers would have no statutory footing. Trustees and providers have been working hard over recent years to address the scourge of scams and have strong due diligence procedures in place to weed out the bad schemes. We would prefer to see a position that where the trustees have seen evidence of a “red flag” (as defined by the regulations) schemes could still halt the transfer and where there are “amber flags”, members to undertake MaPS Scam guidance.
“The new system risks trustees making transfers where red flags of concern are known to exist. None of us want a unwieldy or overly complicated system as most transfers are legitimate but the rise of scams has been swift and shocking and the proposed method needs some further thought.”
The Pensions Regulator executive director frontline regulation Nicola Parish says: “The vast majority of pension transfers are legitimate. But, for the small minority that are not, these welcome new regulations will provide an additional layer of scam protection for pension savers.
“Along with preparing to change their processes to comply with the regulations, trustees and pension providers should continue to play their part in stopping scams. This includes reporting all suspected scams to Action Fraud, or by calling 101 in Scotland.
“The pension industry can also demonstrate its commitment to ending the scourge of scammers by joining our pledge to combat pension scams campaign which includes a commitment to taking six key saver-protecting actions.”
