New pension transfer regulations: The power to say ‘no’

11 May 2022

For many years, the response of government and regulators to pensions scams has been weak, to say the least, given the scale of the problem and the suffering caused.

Pension scam victims lose an average of £51,000 of their life savings, according to Action Fraud, and some individuals have lost seven-figure sums. Between January and May 2021, a total of £2,241,774 was reportedly lost to pension scammers, according to the Financial Conduct Authority (FCA).

Fraudulent pension transfers are a huge part of the problem, involving the theft of millions of pounds every year. But for a long time, the strongest official response was a leaflet warning pension savers. More recently, the banning of cold calls offering ‘pension reviews’, in January 2019, and a recent television advertisement campaign have been positive steps, but public awareness persists at low levels. The FCA reports that only 40% of people they surveyed in 2021 knew to be wary of opportunities to transfer their pension.

Prior to the new regulations, scheme trustees and administrators had a duty to carry out careful due diligence and warn pension savers about a suspected scam. The problem was that they had no real power to refuse a statutory transfer. This put them in a difficult position, on the one hand having to carry out due diligence with care, while on the other hand having no real power to stop a transfer, to which the member has a statutory right.

The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021

New regulations came into force on 30 November 2021 and apply to all transfer requests made after this date. Under these regulations, transfers fall into one of two conditions.

The First Condition is where the receiving scheme is a type listed in the regulations. These are: a public service pension scheme, an authorised Master Trust on The Pensions Regulator’s (TPR’s) published list, and a Collective Defined Contribution (CDC) scheme that has obtained authorisation and is included on TPR’s published list

Transfers that satisfy the First Condition – where the trustees or administrators are satisfied beyond reasonable doubt that the transfer is to a receiving scheme listed in the legislation – are relatively straightforward and do not require a great deal of additional due diligence.

The Second Condition covers all other receiving schemes, and is broadly split into two types. Type one applies to low risk, UK-based personal pension schemes, where the trustees or administrators have already carried out sufficient due diligence to decide that the transfer can proceed without further checks. This can be achieved by the creation and maintenance of a ‘clean list’.

First Actuarial is taking the approach of having a ‘virtual clean list’. Essentially if the provider appears on the current list of approved providers with the FCA and the Prudential Regulation Authority (PRA) at the point of transfer, then the transfer can proceed without further due diligence.  This approach ensures that we are basing our decision on the most up to date approval status of the UK based pension provider.

Type two applies to receiving schemes that are either occupational, Qualifying Recognised Overseas Pension Schemes (QROPS), or schemes that require further due diligence (i.e. those that are not on the ‘clean list’ as detailed above). Proposed transfers to such occupational or QROPS arrangements require the collection of evidence to show employment and or residency links.

Red and amber flag system

The regulations also introduce a system of red and amber flags.

There are six red flags:

• The member has failed to provide required information
• The member has not provided evidence of receiving MoneyHelper guidance
• Someone has carried out regulated activity without the correct regulatory status
• The transfer request follows unsolicited contact
• An incentive was offered to the member to make the transfer
• The member was pressurised to make the transfer.

And there are seven amber flags:

• The member has not shown an employment or residency link
• The member cannot show an employment or residency link
• There are high risk or unregulated investments included in the receiving scheme
• The receiving scheme charges are high or unclear
• The receiving scheme investment structure is unclear, complex or unorthodox
• Overseas investments are included in the receiving scheme
• There is a sharp or unusual rise in transfers involving the same adviser or receiving scheme.

Scheme administrators should make a risk-based decision when assessing whether any amber flags are present. If it is felt that there are amber flags, the member must attend a guidance session with MoneyHelper, a free information service provided by the Government.

Following that session, the member will be given a unique reference number. If this is not provided to the transferring scheme, then the administrators give the case a red flag.

If the administrators decide (on behalf of the trustees) that on the balance of probabilities there is one or more red flag present, then the transfer must be refused. Where this is the case, the member must receive, within seven working days, clear communication that there are factors in place that remove the statutory right to transfer and that they are at risk of being scammed. If a scam is suspected, it should be reported to Action Fraud and the FCA.

For transfers to occupational schemes or QROPS schemes, the administrator is responsible for obtaining the required evidence of employment or residency links. It is encouraging that the Pension Scams Industry Group estimates that only around 5% of current transfers will require the employment links, residency links or additional due diligence work.

A welcome opportunity to combat pension scams

Although the new regulations will add to scheme administration workload, I am hugely in favour of them. They will finally make the due diligence process worthwhile. The regulations give trustees and administrators the power to protect their members from fraudulent pension transfers, which can only be a positive outcome for pension savers.

Could this be the end to fraudulent pension transfers, or will scammers evolve to find ways around the regulations? I sincerely hope that the former is true and that fraudulent pension transfers become the ghost of pensions past.