Walking a fine line on DB transfer restrictions

A sobering thought for you: I have recently spent a lot of time talking about pension scams. This is partly due to the light the pandemic has shone on the problem, but there is also a growing focus from the industry, regulators, and Government.

The scam of pension liberation or trust-busting – where victims are encouraged to transfer to another pension scheme and take the funds early – is rarer now than 10 years ago. HMRC now takes a more stringent attitude to registering pension schemes, but there’s also a more robust approach adopted by the industry.

However, most people have a statutory right to transfer. If a scheme suspects scam activity, they can write to the member, or phone them up, to tell them of the dangers, including the potential unauthorised payment charges they will have to stomach. But if someone is intent on transferring, the scheme administrator cannot stop them.

That is, up to now. From 30 November, new regulations mean trustees and scheme administrators will have this ultimate power. In introducing this, the Department for Work and Pensions (DWP) has had to walk a fine line. The regulations have to be flexible enough to allow the ‘good transfers’ to go ahead; the DWP cannot risk bringing the transfer market to a standstill.

Working collaboratively with the industry, the DWP has managed to achieve this balance. Any transfer to a public-sector scheme, a master trust or a collective defined contribution scheme (if you can find one) can go ahead unchecked. For pension transfers to other occupational pension schemes, the member must give the scheme administrator evidence of a link to the employer, or a link demonstrating residency if the transfer is to a QROPS.

If the transfer is to another scheme type – for example, a SIPP – then, if the scheme administrator or trustee has no reason to suspect scam activity, the transfer can go ahead, and the member retains their statutory right to transfer. Schemes will conduct their own due diligence and draw up a list of schemes to which transfers can be waved through. Your client’s transfer from another platform to AJ Bell should not be held up by these new regulations.

In the very few cases where scheme administrators do have reason to pause, they can ask the member scam-related questions. If the answers throw up any ‘red flags’, then the transfer must not proceed. Examples of red flags include where the member has not responded to the scheme administrator’s questions or where they have received advice from an unregulated party.

If the answers to the questions throw up ‘amber flags’, the scheme administrator must ask the member to get scam advice from MoneyHelper. Once they have proven they have done this, the transfer can go ahead. Amber flags include where there are high risk or unregulated investments in the new scheme or the investment structure is complicated or unorthodox.

Being able to stop scam transfers is an important step forward, but it cannot be done at the detriment of the pension transfer market. We need to keep people safe as well as help them transfer easily and quickly between pension plans.

This article was previously published by International Investment