Out-Law News 2 min. read
27 Jun 2023, 9:01 am
The feedback was given to the Department for Work and Pensions (DWP) as part of a review marking 18 months since the pension transfer regulations came into force in November 2021.
The rules, which restrict the statutory right to a pension transfer when potential scam risks are identified, were set to limit transfers to suspected scam schemes. However, the DWP review highlighted unintended consequences to the pension transfer market as a result of their application. The overseas investments amber flag and the incentives red flag are among the most problematic provisions for pension savers as well as the trustees and scheme managers, according to its report.
Under the regulations, an amber flag is present when the scheme to which the member wishes to transfer includes overseas investments. Once an amber flag is identified, the transferring member must be referred to government advice service MoneyHelper. As most pension schemes include overseas investments, it means that an amber flag can exist even when the transferring scheme has no concerns or the transactions are straightforward.
The review found that in 57% of cases, amber flags were raised due to “overseas investments are included in the scheme” – the most common reason for the flag being triggered. The second most common reason for an amber flag was “high risk or unregulated investments included in receiving scheme”, which accounted for 15% of cases.
Presently, there is too much uncertainty for the industry, given any transfer – including straightforward ones – could give rise to flags
The large volume of amber flagged transfers has resulted in a surge in requests referred to MoneyHelper, and a corresponding increase in waiting times for a pension safeguarding appointment. The wait time for an appointment has increased from an average of two to six weeks over the 18-month period of the regulations, according to the report.
This prolonged wait time has delayed transfers and made them more costly in many cases, both in terms of the impact on investment decisions and additional personal waiting time.
The incentives red flag was also criticised for causing transfers to be blocked due to differences in interpretation by some providers. If the member requesting the transfer has been offered an incentive to do so, a red flag is triggered, which supposedly indicates a high risk of a scam and allows ceding scheme trustees to refuse to transfer.
Pension scams expert Ben Fairhead of Pinsent Masons said: “It is welcome that the DWP has recognised concerns about the operation of the regulations although it is unclear how long it will take to complete the further work envisaged in order to identify and implement changes.”
The regulations provide for two broad types of transfer: those under the ‘first condition’ and all other types, under the ‘second condition’. The first condition applies when the receiving scheme is one of three types: a public service pension scheme; an authorised master trust; or an authorised collective money purchase scheme on The Pensions Regulator (TPR) list. Transfers to other types of scheme are second condition transfers.
First condition transfers are the most straightforward and simply require trustees or scheme managers to confirm that the receiving scheme is one of the three listed types.
Fairhead suggested that 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 “could be the best way of marrying up the law with the original policy intent”.
“This would allow the 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 – could give rise to flags such as overseas investments and incentives,” he explained.
Following the review, the DWP said that it would conduct further work with the pensions industry and TPR to consider if changes could be implemented to the regulations to improve the pension transfer experience, without undermining the policy intent.
“Having accepted the regulations are not working perfectly, it would be good to see some impetus established in delivering the changes needed,” said Fairhead.
10 Nov 2020
30 Nov 2021