The UK's Department for Work and Pensions (DWP) will work with workplace pension schemes and The Pensions Regulator (TPR) to improve the effectiveness of the regulations concerning defined benefit (DB) pension transfers.
The DWP's review of the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 - published yesterday (21 June) - analysed the operation, appropriateness and effectiveness of the regulations, which provided schemes themselves with enhanced powers to block or halt transfers.
The regulations, which came into force in November 2021, gave trustees broadened powers to halt a potential transfer under 'red' and 'amber flag' warnings if the trustees suspected there was risk of a scam. The review sought to establish whether there was a need to amend the red and amber warnings based on potential changes to scammer methodology.
The department's review carried out a data sharing exercise with 20 scheme administrators and industry organisations, 11 of which submitted data returns which were aggregated for the review. The membership of these 11 organisations includes over ten million members in both DB and defined contribution arrangements.
The data - gathered between 1 January 2022 and 31 December 2022 - assessed 290,000 completed transfers and found 94% were completed under condition 1 or condition 2, where no flag warnings were found. In addition, 5% of the transfers were completed outside of the regulations (contractual or discretionary transfer), while only 1% of transfers were completed with a red or amber flag present.
The review also showed 130,000 transfers required subsequent due diligence checks under condition 2, and found 83% of these transfers were completed under condition 2 where no flags were present, while 12% were completed as a contractual or discretionary transfer and 3% were completed as a condition 1 transfer. Where an amber or red flag warning was found, 2% of transfers were completed.
Overseas warning flags a ‘main concern'
The DWP reported across the 290,000 transfers, 2,400 raised an amber flag warning. Of these, 57% of warnings were raised due to the inclusion of 'overseas investments', while 15% were issued due to 'high risk or unregulated investments' and 10% were issued due to 'unclear or high' charges.
The department said industry feedback noted the incentives and overseas investment warning flags are the "main concerns" with the applications of the regulations, and flagged these regulations were causing delays for savers as well as trustees and scheme managers. It added there has been "limited feedback" on amber flags relating to "high risks or unregulated investments" as well as "unclear or high fees" being charged.
It said: "The DWP will therefore conduct further work with the pensions industry and TPR to consider if changes could be implemented to the regulations to improve the pension transfer experience, without undermining the policy intent."
The DWP also said 300 of the transfers generated at least one red flag warning. Of these warnings, 47% were given due to the member failing to provide the required information, 26% were issued because the member failed to provide evidence of receiving MoneyHelper guidance and 17% were flagged due to an individual carrying out "regulated activity without the right regulatory status".
In its conclusion, the DWP said the initial policy intent of the regulations remains appropriate and have prevents around 2,000 transfers from occurring which could have been fraudulent. It said this is due to trustees and scheme managers acting when they have concerns.
Also, in the department's response to the Work and Pensions Select Committee's report into pension scams, it agreed to publish a review of the legislation within 18 months of it coming into force to ascertain the effectiveness of the regulations and to ensure pension savers are provided with maximum protection from potential scams.
