According to the Financial Conduct Authority, a total of £2,241,774 worth of of pension-scam losses has been reported to Action Fraud since the start of 2021 (between January and May).
In a further effort to prevent pension scams, regulations coming into force on November 30 will require checks to assess whether a pension transfer request meets certain conditions to enable a statutory right to transfer.
The regulations will empower trustees and scheme managers to prevent a transfer request when a ‘red flag’ is present; for example, if a scheme member requests a transfer after receiving unsolicited contact or has been offered an incentive to transfer.
In instances of any ‘amber flags’, such as investments that would normally only be offered to sophisticated investors, a member must obtain guidance from the government's MoneyHelper service before the transfer may go ahead.
Differences of opinion
The Department for Work and Pensions reported concerns from consultation respondents that savers may feel inconvenienced if they have to obtain guidance after having already taken advice.
However, the department says it believes that the requirement should be retained: “Financial advice provides an invaluable service for pension savers through formal recommendations on how to use savings to achieve the retirement envisaged, especially the risks of giving up a guaranteed income for market dependent returns, but does not provide scam specific guidance.
“DWP is also concerned that an exemption for the guidance requirement for those who have taken financial advice could be exploited by scammers.”
But Helen Cavanagh, consultant at XPS Pensions Group, says: “We would expect well-advised members to pass one of the conditions set out in the regulations, and so the impact on these members should be limited.”
The DWP says it expects the requirement for guidance from MoneyHelper will be rare where advice has already been taken, and likely only to arise when an adviser recommends an 'insistent saver' not to transfer.
Around one in 10 transfers (at least 12 per cent) could have been blocked over the past year if the new regulations had been in force, according to XPS Pensions Group.
But Kathy Cruse, director, quality assurance at Willis Towers Watson, describes the changes as “far reaching” in impact:
“They actually affect all transfers, to the extent that there is a need to change member communications to include references to these new requirements, even where there is no direct impact on the due diligence steps that are needed and which are typically already in place.”
While the strengthening of transfer regulations will make a “real difference in the fight against pension scams”, according to Cavanagh, she adds that the new regulations are not a panacea: “[They] only cover a limited number of warning signs and cannot be expected to capture all possible scams. If trustees are only considering the flags in the regulations, then they may miss other scam warning signs.
“Our experience is that in the past year, half of even those transfers that could have proceeded under the new regulations exhibited at least one warning sign of a scam or potential poor member outcome that is not captured by the new regulations, such as the member being advised that they are able to access their benefits before age 55, despite not being in ill health, or the member being promised a guaranteed return.
“For this reason, it's imperative that trustees have in place a robust scam-protection process that identifies wider scam-warning signs to give members as full protection as possible from scammers.”
Restricting the statutory right to transfer
The upcoming measures follow a High Court judgement in the case of Donna-Marie Hughes and Royal London in 2016, regarding an appeal by the former against a determination of the Pensions Ombudsman.
In a statement at the time, Pensions Ombudsman Anthony Arter said the High Court ruling “provides instruction to trustees and administrators that, assuming the other requirements for a statutory transfer right are made out, members do not need to be in receipt of earnings from an employer sponsoring the occupational pension scheme to which they wish to transfer their pension. Earnings from another source are sufficient.
“It seems likely that most transferring members will meet this requirement so, beyond verification of earnings and the provision of risk warnings, trustees and administrators will be conscious that under current legislation they cannot refuse such a transfer – even if they have significant concerns that it may be for the purposes of pension liberation.”
But under the new measures, trustees, pension managers and administrators must request evidence from a member to demonstrate an employment link if the transfer is to an occupational pension scheme.
Karl Lidgley, client manager third-party administration at Hymans Robertson, notes that the new measures add an additional layer of governance for suspect transfers that should assist in identifying potential scams:
“This will enable trustees to refuse a transfer where it was previously difficult for them to do so. Overall, it should help prevent scams and provide a higher level of protection for savers' pensions.”
However, John Wilson, head of technical at Spence & Partners, says trustees may feel “exposed on two fronts: blocking transfers that turn out not to be scams and allowing transfers that do ultimately involve a scam.”
Indeed, Kirsty Pake, senior associate at law firm Sackers, highlights the subjective nature of some of the flags.
The approach of the Pensions Ombudsman when a scheme ‘gets it wrong’ will be interesting.John Wilson, head of technical at Spence & PartnersAn amber flag is present where trustees or managers of the transferring scheme decide that “there are any unclear or high fees being charged by the receiving scheme”, for example: “Trustees and their administrator will need to decide who is best placed to determine whether a red or amber flag is present and how this should be dealt with,” says Pake.
“Subjective decisions may be subject to future challenge, so it will be important to keep a detailed record of both the rationale and any supporting evidence relied upon in reaching the decision.
“It is also important to ensure that trustees act in line with their duties and are not influenced by extraneous factors, such as their own personal view of the member’s reasoning and approach.
“Acting dispassionately, consistently and in line with the regulations will put trustees in the best position to justify the actions they take.”
As Wilson says: “The approach of the Pensions Ombudsman when a scheme ‘gets it wrong’ will be interesting.”
Chloe Cheung is a features writer at FTAdviser
