Pick and mix approach to transfer law won’t work

Two years ago, the UK government introduced ‘red and amber flag’ regulations to protect people and their hard-earned retirement savings from ruthless criminals.

The aim of these regulations was to give pension providers the power to protect savers by halting transfers to scam schemes. The regulations work by requiring providers to ‘flag’ transfers where the signs of a scam are present.
The regulations have put breathing space into the pension transfer process so an assessment can be made to see whether, in cases where common features of a fraud are present, it can be assessed whether a scheme is bona fide or not, and if a member’s savings are safe. This is an invaluable protection to members, especially those who are subject to advertising from unregulated sources.

However, the changes in the law governing how pension transfers work have caused legal and administrative challenges. This is because some of the common features of a scam; for example, transfer incentives are also used by legitimate providers. 

The drafting of the law doesn’t entirely match the policy intent and sometimes providers are legally required to flag transfers that are obviously legitimate, resulting in them being caught by these rules. This is sometimes due to the receiving scheme offering incentives, a common market practice for non-workplace pension providers and also a common tactic of scammers. 

The regulations do not adequately distinguish between the two, which means that any transfer where an incentive is present must be red flagged. This can cause frustration as it stalls transfers and increases transfer times. 

Pick and mix won’t work

While it’s easy to see how this is frustrating for consolidators who legitimately use incentives, we cannot take a “pick and mix” approach to financial services legislation. We cannot choose which parts of the law to observe and which to disregard. We must follow the law, even when it is inconvenient.
In addition, we can see from the latest data that transfer times are coming down. There are clear improvements across the industry but our experience over the past two years tells us that some members are not always making an informed choice based on the information available to them. 

It’s clear from the completion of questionnaires, where they are required, that savers are not always considering charges, investment returns and levels of service when submitting a transfer request. While it’s important that transfer times are brought down as much as possible, it is essential this is balanced against protecting members and enabling them to make informed decisions. 

At a time when people are naturally watching what they spend, it’s important that consumers are aware of what they are paying for their pension. 

Currently the vast majority of savers do not choose to engage with their pensions, and it is nearly impossible for people to compare different products and schemes and make a judgement about what will best suit their needs. Transparency around charges is vital, and this information should be presented to members before they make a decision.

The proposed standardised value for money metrics, covering investment, cost and service standards for all, should be quickly adapted to work for consumers, after they have been trialled with pensions professionals.

While delays to transfers can pose frustrations, ultimately the red flag regulations, which the DWP is currently reviewing, have been successful. Whatever the outcome of the review, it is paramount that member protection must remain at the heart of all transfers.