UK Pensions: Pension scams and amber flags: is the future orange?

In recent years, many defined benefit (DB) pension scheme members have taken advantage of the ability to transfer their DB pension pots out of their schemes, to be able to access their money in different and more flexible ways. In practice, this often means a transfer to a self-invested personal pension (SIPP). However, the industry has been plagued by unscrupulous advisers and unsuitable receiving schemes, which have often left transferring trustees uncomfortable, but with little power to prevent a transfer that they fear will not be in a member’s best interests.

In May this year, the Department for Work and Pensions (DWP) published a consultation on proposed new regulations which would give trustees additional powers to stop transfers where they have scam concerns.

The draft regulations introduce the concept of ‘red flags’ and ‘amber flags’.

If a red flag is present, trustees can deny the transfer request. Red flags include where the member is being advised by someone without the appropriate permissions, has been cold called or approached on an unsolicited basis, has been offered an incentive to transfer, or is being pressured to make the transfer quickly. Several of our clients currently see these circumstances in transfer requests on a regular basis, but despite their discomfort, find their hands tied by the current law which requires a transfer to be made if very basic statutory conditions are satisfied. These red flags would be a useful tool for trustees to protect members in situations where there is a very clear risk of a scam.

The amber flag regime is more nebulous. If present, the trustees must require that the member takes scams guidance from a newly created government service known as MoneyHelper. Once the member provides evidence of having taken this advice, the transfer can proceed. Amber flags mostly relate to the characteristics of the receiving scheme; including where the receiving scheme contains high risk or unregulated investments, unclear or high fees, complex or unorthodox investment structures or overseas investments. It is also an amber flag where an overseas adviser has advised the member, or if the trustees are aware of a high volume of requests involving a single receiving scheme or adviser.

Whilst these features all seem logical inclusions, what is not clear is to what extent the trustees need to diligence the receiving schemes or the request to uncover this information. The explanatory notes to the draft regulations state that “the trustees or managers of the transferring scheme are not required to seek information from the member to decide whether [there are red or amber flags] but have the power to seek such information”. The consultation includes a set of standard questions that it suggests trustees ask members, and it specifically states that the DWP does “not wish to see evidence gathering imposed where it is not needed” and that any questions asked beyond these standard questions should be proportionate and not unfairly burden members.

However, the consultation does not consider what happens if a member gives limited high level responses to this questioning; to what extent do trustees need to dig deeper and push for answers? And is it really a trustee’s remit to be able to make an assessment of whether another scheme contains high risk investments? What is the threshold for ‘high risk’ (unhelpfully defined by the draft regulations to mean ‘at the high end of, or beyond, the normal range of risk in the current financial market’)?

We wonder whether trustees will respond to these difficulties by erring on the side of caution and simply raising the amber flag wherever they have doubts, therefore requiring members to take MoneyHelper guidance. This ought to help with trustee risk and liability in the future if the member did ever return with a complaint of pension scamming. However, this raises the question of whether the newly established MoneyHelper service will be equipped to deal with high numbers of members requiring guidance?

The consultation ran until June 10, 2021, and a consultation response (presumably with a final version of the regulations) is expected imminently. Watch this space to see whether the scope of the flags is altered or widened, and whether the role of the trustees and the level of diligence and investigation that will be required of them is clarified further.