Department for Work and Pensions (DWP) proposals to amend pension transfer regulations are welcome but further guidance will be needed, the industry says.
Yesterday (9 June), the government published its long-awaited consultation on key changes to the traffic-light transfer conditions which were introduced back in November 2021.
The DWP's proposed amendments to the regulations broaden the circumstances in which pension scheme trustees can go ahead with a transfer without engaging enhanced due diligence – allowing them to make a transfer to a scheme where they are satisfied, on the balance of probabilities, that the scheme is "reputable".
AJ Bell head of public policy Rachel Vahey said: "It's right that trustees and scheme administrators take steps to protect people from pension scams, but in too many cases that caution has become a barrier to legitimate transfers.
"Savers are being left stuck with unnecessary delays, despite simply trying to move their pension in line with their wishes. It's therefore a major step forward that the government has recognised the scale of the problem and is now acting to help unblock these transfers.
"Rewriting these regulations to include reputable SIPPs within the first condition and to remove the overseas investment amber flag will mean more transfers can progress smoothly and quickly, without getting snagged on the transfer delays and excessive bureaucracy currently being invoked by some pension schemes. This will help members take control of their pensions, achieve better outcomes, and create greater trust in the pension industry."
She added: "Although the industry has been waiting for these proposals for a long time, they are doubly welcome as they represent a completely different direction of travel than that taken by recent FCA proposed changes to transfers which threaten to add significant delays to non-advised transfers. The Financial Conduct Authority should now draw on the rationale behind these new proposals in its approach to non-advised transfers in order to meaningfully minimise delays for pension savers."
However, Vahey pointed out that the DWP is also tightening up controls on transfers to SSAS. "In future, trustees and scheme administrators can raise a red flag and stop the transfer altogether if they have concerns that there is not a strong employment link between the member and the business that set up the SSAS."
Sackers partner Adeline Chapman said the existing transfer conditions were designed to help curb the number of pension savers falling victim to scams but said the traffic-light system for transfers – with amber flags requiring pension savers to seek guidance and red flags stopping the process altogether, have posed problems in practice.
She said feedback to the government's 2023 review into the regulations suggested that certain provisions in the regulations – namely the overseas investments and incentives flags – were causing delays or preventing otherwise legitimate transfers from happening altogether.
Commenting on the proposed changes to the regulation, Chapman said: "With the regulations already requiring trustees to assess whether the proposed receiving scheme includes investment features which might be a cause for concern, such as high‑risk or unregulated investments, the current amber flag in relation to overseas investments will be removed.
"This will no doubt be very much welcomed by the industry, given that overseas investments are held by many pension schemes."
She added: "The red flag relating to incentives was also widely expected to be downgraded. But, with the government clearly conscious that incentives and scams often go hand-in-hand, it has decided to keep this flag firmly in place. Instead, it has opted to broaden the circumstances in which trustees can go ahead with a transfer without engaging this extra level of due diligence.
"In future, therefore, trustees will be able to make a transfer to a scheme (even those offering some form of incentive) where they are satisfied, on the balance of probabilities, that the scheme is ‘reputable'."
Good intentions
Arc Pensions Law partner Matthew Swynnerton said the transfer regulations had "undoubtedly" been helpful in reducing the number of transfers to scam schemes since 2021 but had also created significant debate about how easily the red and amber flags were engaged, in particular the amber overseas investment flag.
He said: "The intentions were good but did not match up perfectly with the wording in the regulations, with flags often triggered in relation to transfers that arguably do not bear the hallmarks of a scam.
"The proposed changes should go a long way to address that. The introduction of the concept of a ‘reputable scheme' in the first condition will put more onus on trustees to think about operation of a clean or green list but it should also reduce unnecessary referrals to MoneyHelper as there will simply be no need to look at the flags if the decision is made that the receiving scheme is reputable. Many transfers are straightforward and should be capable of going through swiftly."
He added the proposed removal of the overseas investment flag would likely be widely welcomed.
Swynnerton explained: "A very large number of reputable schemes include overseas investments yet the current regulations suggest every such transfer should be referred to MoneyHelper, putting trustees and providers in the invidious position of having to either potentially breach the regulations or cause unnecessary delays to pension transfers, in either case risking member complaints. This has been a bone of contention ever since the regulations were first implemented."
Putting up barriers
PensionBee also welcomed the consultation saying the proposal to remove the overseas investments amber flag was "long overdue" – adding this accounted for 35% of all amber flags since 2021 despite overseas investments being a standard feature of almost all legitimate pension schemes.
But the provider said the proposed regulations include a list of suggested factors which trustees and schemes may consider when assessing whether a receiving scheme is ‘reputable' as part of their due diligence – warning care needed to be taken to make sure these factors did not cause future delays.
PensionBee UK chief business officer Lisa Picardo said: "Care needs to be taken so that this isn't used by some as a back-door way of needlessly causing friction and once again putting up barriers."
Picardo added that, while amending the transfer regulations to reduce friction was an "important piece of the pension transfer puzzle" there were others, such as the UK's six-month statutory transfer deadline, which she said has not been updated since the nineties.
She said: "With the slowest providers still taking more than 90 days on average to release savers' money, we hope this consultation marks the beginning of a broader reset of the pension transfer system, not the end of it. Whilst consumer protection is to be respected, so too must a consumer's right to move their retirement savings."
Scheme guidance needed
LCP partner Christian Macnab agreed bringing reputable schemes within the first condition looked "helpful" – noting it should allow more straightforward transfers to proceed without needing to go through the more involved red and amber flag checks, provided trustees and scheme managers are satisfied that the receiving scheme is reputable.
He agreed the proposed removal of the overseas investment amber flag felt like a "sensible step" – noting that, where a transfer does not meet the first condition, trustees and scheme managers would still need to consider whether other red or amber flags are present, so the overseas investment flag should not be needed as a broad-brush way of identifying potential risk.
Similarly, Macnab said that, while the red flag relating to member incentives is not being removed, this should be less problematic in practice where the transfer is to a reputable scheme and the first condition is met, as the red and amber flag checks should not need to be considered.
But he said the success of the amended rules would depend on further guidance for schemes and trustees.
Macnab explained: "The success of this change will depend on clear, practical guidance on what ‘reputable' means in practice. Input from DWP, The Pensions Regulator (TPR) and industry bodies such as Pension Scams Industry Group will be important here, so that schemes can take a consistent and proportionate approach rather than each developing their own informal view of which schemes they are comfortable transferring to."
This article was originally published by PA's sister title Professional Pensions
To read all of PA's pension transfer coverage, visit here
