'More work needed' to speed up pension transfer scam protection measures

In its Review of the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 the DWP said feedback from the pensions industry suggested there were issues with the practical application of the red and amber flag system.

The measures, introduced in November 2021 were part of wider regulatory and legal changes aimed at stopping fraudsters from scamming pension scheme members out of their funds.

Pension trustees and scheme managers were given the power to act where they had concerns about a transfer and were intended to provide a safeguard against scams, whilst continuing to enable the majority of transfers to proceed without undue delay.

Incentives and overseas investments

In 2019 the government banned cold calling and introduced rules aimed at making it harder for fraudsters to open pension schemes.

It also embarked on securing primary legislation which would introduce a limit to the statutory right transfer.

In May 2021, a public consultation; Pension Scams: Empowering Trustees and Protecting Members sought views on plans to limit the statutory right to transfer; the DWP said it was felt some of the proposed clauses did not go far enough to provide protection against the methods being used by scammers. 

The introduction of the red flags and amber flags was aimed to help provide another layer of protection.

Red flags are circumstances where the pension industry believes there was a significant risk of a scam, for example, unsolicited contact to persuade someone to transfer.

Amber flags are where the pensions industry believes there may be a risk, but equally the circumstances could be legitimate, for example, fees being charged by the receiving scheme are unclear or high.

The report found the introduction of the red and amber flags had resulted in some delays, in particular the ‘incentives’ red flag and the ‘overseas investments’ amber flags.

Most common amber and red flags

The DWP said 94 per cent of 290,000 transfers between 1 January 2022 to 31 December 2022 were completed where no flags were present

From the 290,000 transfers, 2,400 transfers were given at least one amber flag; this meant 96 per cent of these transfers did proceed to transfer whilst 4 per cent did not.

The 3 most common amber flags were:

• ‘Overseas investments are included in the scheme’ (57 per cent)

• ‘High risk or unregulated investments included in receiving scheme’ (15 per cent)

• ‘The scheme charges are unclear or high’ (10 per cent)

The transfers with amber flags that were less likely to proceed were:

• Incomplete evidence/information provided (12 per cent)

• The scheme charges are unclear or high (10 per cent)

• Evidence not genuine/not provided directly (seven per cent)

The DWP admitted the overseas investment amber flag needed to be more clearly defined or removed. "As it is structured it can mean that an amber flag needs to be raised, even when schemes have no concerns," the DWP admitted.

It also noted the incentives flag had incorrectly blocked transfers due to the different interpretation of the flag by some providers.

Other findings included:

• Transfers are taking longer due to the additional due diligence checks required and longer waiting times for MoneyHelper appointments.

• Several individuals are required to attend multiple safeguarding appointments, even if they are consolidating because individual schemes are identifying flags.

• Evidence requirements for an employment link can be excessive on pension members.

Scale of pension transfer delays

Data published by Origo showed that the average ceding days for a transfer had increased from 13.4 in 2021 to 14 days in 2022 and for simpler transfers, the average ceding days had increased from 11.3 days to 12.0 days. This was a  four per cent and six per cent increase respectively. 

Prior to 2021, the average ceding days increased from 8.7 days in 2019 to 10.7 days in 2020. 

The DWP added: "There is a consensus from pensions industry feedback that the original policy intent of preventing or minimising the risk of someone transferring into a scam pension scheme remains appropriate and in general the regulations are the way to deliver that."

"It is recognised that the regulations give trustees and scheme managers the ability to act where they have concerns, and it is estimated that the regulations have stopped approximately 2000 transfers taking place which may have been scams/fraudulent."

Pensions industry says more needs to be done

David Brooks, head of policy at consultancy Broadstone, said the industry needed to continue working on ways of preventing fraud, but also in making sure legitimate transfer requests were not delayed.

He said: “Today’s report from the DWP is another timely reminder of the damaging impact of scams within the pensions’ industry.

 “When it comes to defined benefit pension transfers, it is absolutely crucial that we balance consumer protections with the ability of savers to make decisions without being blocked or hampered by delays. We look forward to working with DWP to find a route that meets this balance, thereby building trust in the industry and providing certainty for savers.”

Ben Fairhead, a partner at Pinsent Masons, said it was unclear from the report how long it would take to complete the further work envisaged in order to identify and implement changes.  

“A general carve-out from the first condition for any transfer where there is reason to believe the receiving scheme will not be used to facilitate a pension scam looks like it could be the best way of marrying up the law with the original policy intent. This would allow use of clean lists, which the DWP and TPR were keen to encourage. Presently, there is too much uncertainty for the industry, given any transfer – including straightforward ones – give rise to flags such as overseas investments and incentives. 

 “Having accepted the regulations are not working perfectly, it would be good to see some impetus established in delivering the changes needed.” 

Becky O’Connor, director of public affairs at PensionBee, said the Government appears to be turning a blind eye to the negative impact for savers of longer transfer times - another consequence of the scam prevention measures.

"While the review acknowledges transfer times have increased since the regulations came in, it does not analyse the cost of delays or introduce solutions, but refers only to the prospect of ‘further work’. 

"There is clear demand from savers for transferring pensions and they have a reasonable expectation of a hassle-free experience for valid transfers. Slow and difficult transfers cannot be the acceptable fallout from achieving scam reduction targets. We can create a system where transfers are reliable and quick and scams are identified. 

"Until the negative consequences of these regulations are addressed, people will continue to experience frustrating and unnecessary delays when moving pensions from some providers

"Savers are continually reporting difficulties and delays and this review appears not to grasp the scale of that problem for people trying to organise their retirement finances - which can be stressful enough in itself.

"It’s also worth noting that the review references Origo transfer data, which does not include manual transfers, which can be even longer.”

Jamie Clark, pensions specialist at Quilter: “These regulations empowered pension schemes to raise red and amber flags where they saw risk of consumer harm, and in particular scams. While helpful, the broad way in which some of the regulations were worded have resulted in some transfers being needlessly delayed or halted where they pose no risk to the consumer and today’s review does little to iron out the issues.

 “A particular problem has been the wording around overseas investments which intends to flag unregulated and potentially fraudulent investments, but instead catches many kinds of legitimate investments in overseas markets. Today’s data confirms that ‘Overseas investments are included in the scheme’ is the most common amber flag, accounting for more than half of all amber flags raised. The review recognises this is causing delays but stops short of making changes. 

“The DWP should make it an explicit legislative requirement for all pension schemes to provide clear and accurate information to customers on the reason an amber flag has been raised.

The data shows that the reason for 43 per cent of amber flags is ‘unknown to the attendee’ when consumers attended a Money and Pension Advice Service appointment. This amounts to ineffective data collection which leaves a real gap in understanding of how effective the rules have been."

He warned that the gap highlighted the potential for increased consumer disengagement and frustration if they are not clear on the reason as to why their pension transfer has been delayed. Putting the onus on pension schemes to provide clarity could significantly improve this.

“These rules are necessary and welcome, but the failure of the review to address these points of unnecessary friction is disappointing. In particular, there is a clear divergence between policy intention and the practical application of the law when it comes to the overseas investments wording and this needs to be amended as consumers are needlessly suffering delays.”