• Government proposals to tackle pension scheme fraud announced today risk blocking or delaying thousands of legitimate transfers (https://www.gov.uk/government/consultations/pension-scams-empowering-trustees-and-protecting-members/pension-scams-empowering-trustees-and-protecting-members-consultation)
• The plans outlined by the 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
• 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
• Thousands of legitimate transfers to mainstream pension providers could be blocked completely if customers can’t or don’t want to answer these prescribed questions
• The existence of a ‘safe destination’ list may mislead consumers as it implies the DWP has carried out due diligence on those schemes and is endorsing them when that isn’t the case
Andy Bell, chief executive of AJ Bell, comments:
“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.”
Government should ditch ‘safe destination’ list plans
“Having a Government defined ‘safe destination’ list will give consumers the impression that those schemes are impervious to scams. That is not the case and ironically might make them a target for scammers.
“The DWP should abandon the idea of a safe destination list completely and focus on the original intent of these rules, which was ensuring providers have adequate processes and controls in place to spot the red and amber flags, so as they can direct consumers towards Pension Wise or stop the transfer if it is in their best interests. Whether the schemes are on an arbitrary list is irrelevant for consumer protection.
“Since the retirement freedoms were introduced in 2015, the vast majority of scam activity has focused on trying to get people aged 55 and over to invest in dodgy investments outside of pensions. Ensuring scams within pensions are stopped remains important but this is not where the big problems lie in 2021.
“We need some pragmatism from DWP to ensure customers are not harmed by these overzealous proposals. It is clearly not in anyone’s interests to clog up the transfer market or create barriers to savers switching providers and benefitting from lower charges or better service.”
Background – what has the DWP proposed?
The DWP has outlined proposals whereby pension schemes follow a prescribed process before allowing a transfer to another pension scheme to proceed where they have concerns about that transfer. The process is not mandatory, however – providers will have to decide whether or not to follow it.
Step 1: Is 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 Yes, the transfer can go ahead. If No, the provider must move to Step 2 of the process.
Step 2: Can the individual 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)?
If Yes, the transfer can go ahead. If No, the provider must move to Step 3 of the process.
Step 3: The pension scheme the person is transferring from must assess whether to contact the member and ask them a list of set questions (plus any other questions that the scheme considers appropriate) 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.
Step 4: If no red or amber flags are highlighted in the answers, the transfer proceeds.
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.