Government proposals to allow trustees to stop transfers where a scam is suspected could see some scams slip the net, LCP has warned.
In response to the DWP's consultation 'Pension scams: empowering trustees and protecting members', which closes today (June 10), the consultancy warned the rules could have undesired effects, with legitimate transfers being stopped while determined scammers could still get transfers past the line.
It also said it was unclear how the measures would work in practice and that more guidance was needed to make sure the rules were applied consistently.
The government’s proposals include a system of red and amber flags, warning trustees when pension holders wish to transfer their funds to another scheme which does not fulfil certain criteria, for example an employment link between the holder and the occupational scheme they wish to transfer to.
Red flags would be raised for transfers raising serious concerns so that they may not proceed, such as unsolicited sales activity or where the member was under pressure to complete the transfer quickly.
Amber flags would be raised for transfers which raise concerns but which may be addressed by further precautionary measures; these could include transfers to schemes deemed to be “high risk” or “high cost”.
But LCP criticised this criteria for being “highly subjective” and questioned what the threshold would be for a receiving scheme investment to be categorised as ‘high risk’.
It also questioned what would constitute a high charge, saying some receiving schemes were more costly than others for a variety of reasons.
Daniel Jacobson, senior consultant at LCP said: “These new rules have been designed with the best of intentions, but we are concerned that they may not have the desired effect.
“Some key concepts such as ‘high cost’ or ‘high risk’ are very subjective and trustees may not be well placed to make such judgments.
"Unless further clarification is issued there is a risk of inconsistency as different trustees define these terms in different ways."
LCP said trustees could be concerned about a scheme and could trigger several amber flags but they would have no power to stop the transfer if there were no red flags and the member was determined to transfer after taking guidance from the Money and Pensions Service.
LCP has called this a ‘false negative’, where a transfer cannot be blocked under the new rules even if the trustees are convinced it is a scam.
There can also be ‘false positives’ where innovative investment opportunities could trigger an amber flag despite being legitimate, it added.
LCP also said the requirement to establish an employment link was not strong enough as a scammer could easily replicate an employer letter.
Jacobson added: “We are especially concerned that trustees who have real concerns about a destination scheme will not have the right to block a transfer unless a narrow list of red flags is triggered.