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New DWP rules boost pension scams protection

Tom Selby, senior analyst at AJ Bell
  • The Government has set out final rules designed to add a further layer of scams protection for people transferring their pension: https://www.gov.uk/government/consultations/pension-scams-empowering-trustees-and-protecting-members
  • Pension schemes will be required to intervene where they have reason to believe someone is moving their retirement pot to a scheme linked to scam activity
    • Where transfer ‘red flags’ have been raised, the provider will be able to block the transfer outright
    • Where transfer ‘amber flags’ have been raised, the member will need to take official scams guidance from Pension Wise before proceeding
    • Details of the red and amber flags are set out at the end of this press release
  • All transfers to master trusts, collective defined contribution (CDC) schemes and funded public sector schemes will effectively be exempt from the rules as ‘safe destinations’
  • Proposals to include schemes administered by insurance companies in this ‘safe destination’ list have been dropped
  • New rules will be in place from 30 November this year

Tom Selby, senior analyst at AJ Bell, (pictured) comments:

“Unscrupulous scammers have ramped up their activity during the pandemic, spurred by the increased financial vulnerability experienced by millions of people during lockdown.

“Most of these scams now occur outside pensions, with fraudsters often targeting people aged 55 and over by encouraging them to shift their hard-earned retirement pot into a sham investment.

“Nonetheless pension-based scams do still exist, with the focus often on facilitating access before age 55. Given the terrible impact they have on victims – who often end up losing most if not all of their pension – the Government is right to hand schemes greater power to protect members.

“From 30 November, where they have identified concerns, pension providers will be required to intervene and ask questions of the transferring member. Master trusts, CDC schemes and funded public sector schemes are deemed ‘safe destinations’ and will effectively be exempt from the requirements.”

“This doesn’t mean pension providers will have to ask customers scam-related questions in relation to all non-safe destination transfers, only those where what they know of the receiving scheme gives them cause for concern.”

Removal of insurers from safe destination list

“Depending on the level of concern raised by the responses, this intervention could either be to block the transfer altogether or require the member to take scams guidance from Pension Wise.

“Crucially, it will be up to pension schemes to decide whether a transfer is suspicious or not. Whereas previously blocking a suspicious transfer came with the real risk of being sued, this legislation creates a specific legal framework within which members’ interests can be protected.

“Provided firms apply these rules sensibly and don’t delay matters by asking the risk questions on transfers where it is clear the risks are very low, they should add extra security for transferring members without impacting the vast majority of legitimate transfers.”

What is a ‘red flag’?

When a red flag is raised, a pension transfer should not proceed. There are a number of scenarios where a red flag should be raised, including where:

  • the member has not responded to a request for information in relation to a suspicious transfer,
  • the member indicates they have received financial advice from a firm without the appropriate regulatory permissions,
  • the member has requested the transfer following an unsolicited from an individual or firm they had no existing relationship with,
  • the member has been pressured, or indicated they felt pressured, to make the transfer.

What are ‘amber flags’?

When an amber flag is raised, the scheme the member is transferring their pension from will be required to direct them to Pension Wise guidance. This guidance will be specifically about scams.

They will also need to get confirmation the member has received that guidance before letting the transfer go ahead.

Scenarios where an amber flag will be present include where:

  • there are high risk or unregulated investments included in the scheme the person is transferring to,
  • the fees being charged by the receiving scheme are unclear or high,
  • the proposed investment structures are complicated or unorthodox,
  • the receiving scheme includes overseas investments,
  • there has been a high volume of transfers to a single receiving scheme or involving a single adviser or firm.

Firms will be expected to determine, via due diligence processes and their understanding of the market, whether they have reason to believe any of the above risks are present. Only where this is the case will they be expected to make enquiries with the transferring member.

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