Delays are not the only problem with existing pension scam rules

Low levels of understanding make pension scheme members particularly vulnerable to a credible pitch from a fraudster. And by the time the member has discovered what’s happened, the criminals have made a clean getaway.

Next week marks 18 months since the new pension transfer regulations were implemented and the deadline the Department for Work and Pensions (DWP) imposed for a review of their efficacy. 

In November 2021, the new regs introduced a system of red and amber flags to give trustees the power to refuse transfers where they identify a heightened risk that could mean it was part of a scam. 

So, as they will be under review, how successful have the measures been to date and what might need to be improved? 

Regulations prompted delays

In 2021, the Pension Scams Industry Group (PSIG) estimated that 5% of all transfer requests might present a concern for trustees and their scheme managers. 

It seems generally accepted that the red and amber flag system is working to prevent scams going through. However, the unintended consequence is that it’s blocking some legitimate transfers with FCA regulated firms.

“How the process is working in practice for firms and customers needs to be looked at and whether or not resulted in a slightly heavy handed approach,” said Becky O’Connor, director of public affairs at PensionBee. 

Another delay comes from an amber flag being raised, as the member must then receive money help or guidance before the transfer can proceed. 

“It can be quite difficult for people to get appointments through Moneyhelper, based on the experience of our customers,” said O’Connor, who has recently called for a 10 day pension transfer switch guarantee to be applied. 

Overly sensitive regulations

Data gathered by Quilter in a freedom of information request, confirms that rules governing these funds were causing difficulties. 

Four out of five (80%) of all amber flags raised were due to an unknown reason or for a potentially low risk transfer relating to overseas investments.

And of the 13,927 MoneyHelper Pension Safeguarding Guidance (PSG) sessions conducted since November 2021, nearly half (43% or 6,050) were conducted for an ‘unknown’ reason, while almost two in five (37% or 5,154) were conducted after a flag was raised on potentially low-risk transfers relating to overseas investments.

Quilter has called for DWP to correct this by redrafting its definition of overseas investments, while making it an explicit legislative requirement for all pension schemes to provide clear and accurate information to customers as to why a an amber flag has been raised. 

Jon Greer, head of retirement policy at Quilter, said: “Pensions savers and their advisers have faced major delays and undue troubles in the past 18 months, and much of this can be attributed to the time taken to review the regulations. 

“It is vital that real change is enacted to ensure a considerably improved process going forward.” 

Though the regulator has suggested the non-statutory transfer rules may be used if the trustees believe there is no high risk, that’s still asking trustees to use discretionary powers to circumvent a flaw in the law

Adeline Chapman, Sackers

A lack of consistency and best practice

Adeline Chapman, a partner at Sackers is Supportive of the amber and red flag system, with the exception of the overseas investment amber flag. 

“It’s a very blunt tool and captures too many funds, as most schemes will have overseas investments these days,” said Chapman. 

“There are already two other investment related flags that adequately allow you to go after the problematic schemes.”

Commentators noted that, aside from the need to see the regulations around the red flag for member incentives clarified, the biggest problems schemes face lies with the inconsistency between the guidance and regulations.

“Guidance is not the law and the courts and pensions ombudsman will start with the law,” said Chapman.

“Though the regulator has suggested the non-statutory transfer rules may be used if the trustees believe there is no high risk, that’s still asking trustees to use discretionary powers to circumvent a flaw in the law.”

Chapman also doesn’t want to see the regulations concerning trustee responsibilities tightened any further. Provided the firm engaged is FCA registered and the transfer triggers no warnings, there should be no responsibility for trustees to assess the quality advice being offered to the member. 

Fraudsters demonstrate patience

Despite cold calling being banned, the scammers have shifted their position to a longer game. 

“We have seen some introducers contacting members not about their pension, but about their broader financial position,” said Chapman.

“Over time, they build a relationship and the conversation extends to cover transfers as well.

“The government needs to stay on top of them morphing, because if the scam structure changes we need to be able to deal with it immediately, as in pensions it can be years before the member knows that they have lost their money.”

On this matter, O’Connor is agreed: “People will still receive cold calls, but there is still a lack of awareness.

“And it’s not just vulnerable people either. Unfortunately, people sound very convincing and experienced people get sucked in.”