Transfers create the opportunity for pension savers to switch to a provider that may offer more flexibility or lower costs. It also creates the very real possibility that a lifetime of retirement savings could be lost in a scam.
The risk from pension fraud has never been higher with some industry sources suggesting that scammers who often use free offers of pension “reviews” and “advice” to find victims may be behind more than one in 10 transfer requests.
Trustees and administrators are at the frontline in the battle against pension fraud, tasked with ensuring member benefits are only transferred to legitimate pension schemes. That’s easier said than done under the current rules – those whose job it is to look after members’ interests cannot necessarily stop a suspicious transfer if the member insists it takes place.
Added to that is the danger that Government proposals to speed up transfers, which may include introducing target times, risk undermining member protection further to the advantage of the fraudsters.
Documentation accompanying the Queen’s Speech outlined a new Pensions Bill designed to build on pension freedoms and consumer information protection, including better financial guidance to consumer and tighter rules around Master Trusts. It also proposed further reform aimed at “removing barriers for consumers to access their pension savings flexibly”.
The aim is to ensure pension savers whose own scheme will not allow them to take pension benefits in the way they want can transfer to a scheme that will. Responding to its consultation Pension transfers and early exit charges, the Government highlighted research showing that transfer times between contract-based schemes averaged 16 days, less than half the 39 days for transfers from trust-based schemes.
It suggested three ways to make the transfer process smoother and more efficient: improved scheme administration including standardised use of electronic transfer processes; streamlining due diligence which may include a “whitelist” of trusted pension providers; and improvements to guidance and communication to help scheme members understand the process and timescales involved.
The Government’s intention is to see trust-based schemes subject to a new requirement to report on an ongoing basis how they are performing “including against possible benchmarks and new transfer targets” (point 2.27).
Transfer requests are a regular part of pension scheme administration but a part which needs careful handling due to the prevalence of pension scams.
One frustration for those tasked with protecting members’ interests is that any member who has a statutory right to a transfer can insist it takes place regardless of evidence they may be falling victim to a scam. This was confirmed in a high profile legal case earlier this when the High Court ruled that a statutory right existed even where a member did not have earnings from a scheme’s sponsoring employer. The provider had blocked the transfer because the scheme bore many of the red flags associated with a scam including the transfer being the result of a cold call, to a newly established scheme with a dormant employer set up to invest in assets overseas.***
Administrators must now analyse the scheme rules and legislation to decide if the statutory right exists. If so, they can highlight any concerns about fraudulent activity to the member to ensure they are aware, but cannot block the transfer. Where there is no statutory right, the trustees must look at all relevant factors including evidence of a scam to decide if a discretionary transfer should be allowed.
The code of practice compiled by the Pension Liberation Industry Group provides a useful foundation for administrators putting in place robust standards for pension transfers. This is one useful weapon in an area where administrators often feel underequipped and left to their own devices.
For a transfer to be “recognised” by HMRC – vital if the scheme making the transfer is to avoid unauthorised payments charges – it must be to a UK registered scheme or a qualifying recognised overseas pension scheme (QROPS). But there is currently no easy or quick way for an administrator to check the accuracy or timeliness of the information given by the receiving scheme.
Speeding up transfers, like spotting scams, may be easier said than done. Tighter transfer targets won’t be much help when a registered status check with HMRC can take up to six weeks. Standardised documentation and processes would help, but likely save days rather than weeks. Encouraging HMRC to share information more quickly would help, as would proposals to establish a “whitelist” of approved pension providers if practical difficulties could be overcome. Electronic data transfer platforms have been proposed but these already exist and allow transactions at the touch of a button, but in many cases only after the more time intensive information gathering and analysis has taken place.
With no sign of the fight against scammers being won, we should acknowledge the case for more haste rather than more speed. Research from Citizens Advice recently found that while three in four people said they are confident they could identify a pension scam, only 12 per cent were able to do so when a scam was presented to them. Pension freedom is a fact of modern life, but unfortunately so are pensions scams.