Pensions: Fraud protection – a report card

In my last article on pensions fraud (Journal, August 2022, 32), I reported on the long awaited powers to refuse to make suspicious pension transfers to protect pension savers from frauds, awarded to pension trustees and managers by the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (SI 2021/1237), that came into force in November 2021.

Acknowledging that the ways in which fraudsters target pension savers are constantly evolving, the Department for Work & Pensions (“DWP”) indicated when the Transfer Regulations were passed that it would assess their success. In July 2022 the DWP and The Pensions Regulator (“TPR”) issued a joint statement noting that there are “concerns about how the Transfer Regulations apply to overseas investments or where small-scale incentives feature in the transfer”.

In June 2023 the DWP issued a report, following its review of the “operation, appropriateness, and effectiveness” of the Transfer Regulations against the policy aim that the legislation and regulations give “the maximum protection for pension savers”.

The report, Review of the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (SI 2021/1237), notes that the Transfer Regulations powers are “intended to provide a safeguard against scams, whilst continuing to enable the majority of transfers to proceed without undue delay”.

The Transfer Regulations include scam indicators known as red and amber flags. Red flags mean an assessment of a significant risk of fraud. Amber flags signal a risk of fraud but further investigation may determine that the circumstances could be legitimate. As part of its review, the DWP considered whether to adjust the red and amber flags.

Review findings

The report is based on data collected on certain pension transfers completed in 2022, covering approximately 290,000 transfers from schemes totalling over 10 million members, and input from across the pensions industry over the whole review period. Data results from those transfers showed:

• 94% were completed to a public service scheme, master trust or collective money purchase scheme or where no flags were present;
• 5% were completed outside of the Transfer Regulations, i.e. contractual or discretionary transfers;
• just 1% were completed with a red or amber flag present.

Three hundred transfers generated at least one red flag, with the three most common red flags being:

• “The member has failed to provide the required information” (47%).
• “The member has not provided evidence of receiving MoneyHelper guidance” (26%).
• “Someone carried out a regulated activity without the right regulatory status” (17%).

The three most common amber flags were:

• “Overseas investments are included in the scheme” (57%).
• “High risk or unregulated investments included in receiving scheme” (15%).
• “The scheme charges are unclear or high” (10%);

and of those less likely to proceed, 10% were because scheme charges were unclear or high, 12% because of incomplete evidence/information, and 7% because evidence was not genuine or not provided directly.

Observations

We can take some reassurance from the very small proportion of transfers generating flags from the sample, but it is essential to bear in mind that there are over 58 million UK pensions. The data collected may not be representative
of the whole industry, in particular in relation to smaller schemes, and the experience of the destination schemes will not be uniform across schemes.

Unsurprisingly, as part of the review the pensions industry agreed that the policy intent of preventing or minimising the risk of transferring to scam pension schemes is appropriate and the Transfer Regulations were the way to achieve that. Some concerns were however flagged:

• The overseas investment amber flag needed to be more clearly defined, or removed so that an amber flag only needs to be raised when schemes have concerns.
• The incentives flag needs to be more clearly defined, as transfers are being blocked due to differing interpretations of the current flag by some providers.
• Transfers are taking longer because of additional due diligence checks required and longer waiting times for MoneyHelper appointments.
• Some individuals are required to attend multiple safeguarding appointments, even if they are consolidating pensions, because individual schemes are identifying flags.
• Evidence requirements for an employment link can be excessive on pension members.

Next steps

The DWP is now considering possible changes to the Transfer Regulations. Refinement to improve the operational position is certainly desirable provided the policy intent of preventing and minimising risk remains paramount, even if the Transfer Regulations require additional steps and extra checks that take time. Maintaining employment link evidential requirements and safeguarding appointments with MoneyHelper are key parts of that. It is essential that trustees, managers and administrators continue to have the support they need to provide protections for pension savers.