The Pension Schemes Act 2021 introduced a new system of red and amber flags, designed to help trustees and pension providers combat suspicious pension transfers.
Our latest insight report looks at the new powers given to trustees and scheme managers and what they mean for employers, scheme members and advisers.
Pension transfer fraud has been rising exponentially in recent years.
In July 2021 Action Fraud data showed that pension transfer scam victims were losing over £50,000 on average. This was more than double the figure it reported in 2020.
Most pension transfers are legitimate, but the Pension Scams Industry Group estimated that in 2021 around 5% of all transfer requests should give trustees and scheme managers cause for concern.
It estimates that around 40,000 pension savers lost £10bn to scams since 2015, many due to transferring to dubious schemes from a workplace pension.
Recent figures from XPS Pensions Group showed that men are more likely to fall victim of pension transfer fraud than women.
According to the pension consultancy, 11% of transfers showed serious warning signs of a pension scam in 2021, compared to 6% of transfer by women.
Higher value transfers were also more likely to show warning signs of a potential scam. The average size of a pension transfer in 2011 was £211,000, while the average size of a transfer demonstrating the most serious ‘red flag’ warning signs of a scam was £279,000.
By making the ability to transfer more conditional, by removing the statutory right to transfer, the government hopes it will become more difficult for scammers to get workplace pension scheme members to transfer their cash.
Most workplace pension providers already carry out due diligence checks and maintain clean lists of transfer destinations, making them well prepared for new requirements which came into force under the Pension Schemes Act 2021 in November.
The new regulations have introduced a system of red and amber flags, requiring providers and trustees refuse transfers where they believe there is a heightened risk the transfer may be part of a scam and/or not in the best interests of the member.
These new regulations are the first time that workplace pension providers and trustees have been given the power to act decisively in response to warning signs of a dubious pension transfer.
Should transfer raise an amber flag, it will require the member to receive guidance from MoneyHelper of a regulated financial adviser before the transfer can proceed.
Amber flags are prompted by a proposed transfer into a scheme with high-risk investments, large or unclear charges in the receiving scheme, moving money overseas, or high levels of transfers into as individual scheme or involving one adviser.
Transfers that raise a red flag require the provider and/or trustees to halt the transfer.
Red flags are raised when financial advice has been provided by unregulated firms or individuals, if there has been unsolicited contact with the scheme member, if incentives to transfer have been offered, or if the scheme member was pressured to act quickly due to a time-limited offer.