Protecting members from pension scams: new restrictions on transfers

United Kingdom

The DWP has published a consultation on proposals to help protect pension scheme members from scams. Broadly, the proposals are intended to:

  • allow certain low risk transfers to continue on the current basis;

  • prevent a statutory transfer being made where the trustees have evidence of a ‘red flag’; and

  • require members to take pension guidance before a statutory transfer can be made when certain risk factors (‘amber flags’) have been identified.  

The consultation closes at midnight on 9 June 2021 and the DWP expects to introduce the new regulations in the autumn, supported by TPR guidance for trustees.

The draft regulations introduce a ‘four condition’ stepped approach to transfers. Trustees cannot make a statutory cash equivalent transfer payment unless one of the conditions is met:

  • First condition: trustees must identify whether the transfer is to one of the prescribed low-risk scheme-types – if the trustees can confirm this then the transfer can go ahead. The low risk schemes are public service schemes, authorised master trusts, authorised collective DC schemes and personal pension schemes provided by insurers.

  • Second condition: where the first condition is not met, the statutory right to transfer will still apply to a UK occupational pension scheme or to a QROPS where the member can demonstrate an ‘employment link’ requiring evidence that contributions have been paid into the scheme as well as evidence of employment earnings from the receiving scheme’s sponsoring employer.

  • Third condition: for a transfer to a QROPS, where the member cannot demonstrate an ‘employment link’ then the statutory transfer can still take place if they can demonstrate a ‘residency link’.

  • Fourth condition: where the first, second or third conditions are not met, trustees must determine if the circumstances give rise to ‘red flags’ or ‘amber flags’. If no flags are present then the transfer can continue. Where the flags may be present, trustees will have the power to request information to assess the circumstances of the transfer. There is a set of standard questions for trustees to use. Where there is an amber flag, the transfer cannot proceed unless the member takes scams guidance from the Money and Pensions Service (unless they have already done so for the same scheme in the last 12 months). Where there is a red flag, the trustees cannot make a statutory transfer.

Amber flags

The proposed amber flags are:

  • high risk or unregulated investments included in the receiving scheme;

  • the fees being charged by the receiving scheme are unclear or high;

  • the proposed investment structures are complicated or unorthodox;

  • the receiving scheme includes overseas investments or any of the advisers are based overseas;

  • there has been a high volume of transfers to a single receiving scheme or involving a single adviser or firm.

Red flags

The proposed red flags are:

  • financial advice has been provided without the appropriate regulatory permissions;

  • the member has been contacted unsolicited;

  • the member was offered incentives to transfer;

  • the member was pressured to complete the transfer quickly;

  • the member has failed to provide information requested by the trustees.

Many trustees have found themselves in a very difficult position where a scam is suspected but the legislation required them to make the transfer. These proposals go some way to removing this problem and should achieve the stated aim of protecting vulnerable members. However, the requirements in the draft regulations are very detailed and may require trustees to make judgement calls which could cause problems in practice: the Minister acknowledges that the regulations will come with additional costs and that there may be potential impacts on businesses due to delays in the transfer process.

As the time to respond is relatively short, we recommend that trustees and administrators carefully consider these proposals.