Government proposals to tackle pension scheme fraud risk pushing pension transfers “back into the dark ages”, industry experts have warned.
The regulations outlined by the Department of Work and Pensions will enable trustees to prevent a transfer request if they see evidence of ‘red flags.’
The DWP said that its earlier 2016 Pension Scams Consultation had shown that while trustees and scheme managers identified potential scams, they are often powerless to prevent them.According to figures from the Pension Scams Industry Group, 5% of all transfer requests give cause for concern.
The Minister for Pensions and Financial Inclusion said: “Pension scams are a menace. They cost people their life savings and have a devastating financial and emotional impact on their victims. The Government is fully committed to working with regulators, industry and enforcement agencies to protect people from pension scams through transfers from one pension scheme to another and make it as hard as possible for criminals to carry out their malevolent intentions.”
As a first step, the DWP is proposing a Government-defined ‘safe destination’ list comprising low-risk schemes including master trusts, collective defined contribution schemes, funded public sector schemes and pension schemes operated by insurance companies.
If a pension saver is not moving to a scheme on the list, they must demonstrate an ‘employment link’ to an occupational pension scheme receiving the transfer. For those individuals unable to do so, the pension scheme the person is transferring from must assess whether to ask them a list of set questions to identify any ‘red’ or ‘amber’ flags.
However, Andy Bell, chief executive of AJ Bell, warned that the cure for protecting pension savers must not be “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.”
Bell said that if providers take a blanket approach and ask questions for 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,” he said.
Bell has urged the government to scrap the ‘safe list’, believing it will give consumers the wrong impression that those schemes are impervious to scams and may actually make them a target for scammers. Instead, Bell believes the DWP should focus on the original intent of the rules, which was ensuring providers have adequate processes and controls in place to spot the red and amber flags.
Bell added: “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 benefiting from lower charges or better service.”
Andrew Tully, technical director at Canada Life, called pension scams a “scourge of society” but said that any measures introduced should not cause undue delays in pension transfers.
Tully said: “These ideas focus on the under 55 age group pre pension freedoms. There are only a few scams which affect transfers before age 55, as most people know there are only very limited circumstances where you can access your money legally pre 55.
“Scammers instead target customers who are age 55 plus when people can legitimately access their funds and these measures will unfortunately do nothing to prevent that. The old adage still applies, buyer beware and if it looks too good to be true, it inevitably is. Simply walk away, delete the email or hang up if you are contacted out of the blue.
“We also have to be careful that any measures introduced don’t cause undue delays in people being able to transfer their pension benefits from one scheme to another. The industry has worked hard to get transfer turnaround times down and it wouldn’t be good if any new measures caused that to go into reverse.”
Ian Browne, pensions expert at Quilter, added: “The future regulations will have to strike a delicate balance between maintaining an efficient and quick transfer market, in which the majority of ‘safe’ transfers aren’t affected, while limiting the scam risk across all schemes. The government will need to work closely with the pensions industry to get the finer details of the legislation right.”
