Investigating Pension Transfers: Only 1% Raised Red or Amber Flags

In a recent study conducted by the Department for Work and Pension (DWP), it was revealed that an overwhelming 94% of completed pension transfers proceeded without any issues or red flags. This comprehensive 18-month review, spanning from December 2021 to February 2023, focused on evaluating the effectiveness of measures introduced following the Pension Schemes Act 2021. This act granted pension scheme administrators the authority to halt a transfer if they suspected a high risk of it being a scam.

The Findings

• Minimal Red and Amber Flags

One of the standout statistics from the study is that only 1% of the completed pension transfers raised red or amber flags. A transfer is deemed complete when the transfer request concludes, either proceeding or not proceeding. Transfers still in the processing phase, where the outcome is undetermined, were not part of this review.

• Amber Flags and Their Reasons

Among the 290,000 transfers investigated, 2,400 received an amber flag. The most common cause for amber flags was the inclusion of overseas investments in the receiving scheme. A notable point here is that 96% of transfers with amber flags ultimately proceeded, while 4% did not.

• Red Flags and Their Causes

A total of 300 red flags were raised during this review. Nearly half of these (47%) were due to customers not providing the necessary information, and a quarter (26%) resulted from a failure to provide evidence of attending a MoneyHelper appointment.

The 2021 Act Conditions

The Pension Schemes Act 2021 introduced two conditions into the pension transfer process:

• Condition 1: The first condition pertains to transfers into Public Service Pension Schemes, Master Trusts, or Collective Money Purchase schemes. These schemes are deemed lower risk and, as such, can expedite transfers.
• Condition 2: The second condition applies to all other statutory transfers not covered by the first condition. Under this condition, pension schemes are required to assess the potential presence of red and amber flags. This ensures that adequate due diligence is performed on a case-by-case basis.

It’s important to note that while the aggregate data shows a low proportion of transfers with red or amber flags, it may not be representative of the experiences of all providers and administrators. Different providers process transfers under these conditions at varying rates, potentially indicating variations in risk assessment practices.

Transfers Requiring Further Assessment

Of the 130,000 transfers that distinguish between condition 1 and condition 2:

• 83% were completed under condition 2 where no flags were present. This highlights the efficiency of the evaluation process for transfers deemed lower risk.
• 12% were completed as contractual or discretionary transfers, suggesting these cases involved special circumstances or agreements.
• 3% were completed as condition 1 transfers, indicating that transfers into specific schemes deemed lower risk were still subject to review.
• 2% were completed where an amber or red flag was present, necessitating additional scrutiny due to perceived risk factors.

This data suggests that approximately 85% of transfers currently undergo condition 2 due diligence checks, ensuring a thorough examination of potential risks.

Amber and Red Flag Types

The three most common amber flags included:

1. ‘Overseas investments are included in the scheme’ (57%): This flag signifies the presence of international investments in the pension scheme. It is crucial to note that international investments, while legitimate, may introduce additional complexities that warrant closer examination.
2. ‘High risk or unregulated investments included in receiving scheme’ (15%): This flag highlights the presence of investments with perceived higher risk or investments not subject to adequate regulatory oversight. It underscores the importance of ensuring that investments align with regulatory standards.
3. ‘The scheme charges are unclear or high’ (10%): This flag draws attention to potential issues regarding the transparency or cost-effectiveness of the pension scheme. Clarity in financial matters is paramount to maintaining trust in the pension transfer process.

Transfers with amber flags that were less likely to proceed involved:

• Incomplete evidence/information provided (12%): This situation arises when critical documentation or information is missing, emphasizing the importance of thorough record-keeping.
• The scheme charges are unclear or high (10%): When the financial aspects of a scheme are not adequately communicated or appear unfavourable, it may raise concerns.
• Evidence not genuine/not provided directly (7%): In cases where the authenticity of provided evidence is questionable or not directly provided, additional caution is warranted.

Qualitative Feedback

The DWP collected qualitative feedback from the pensions industry during quarterly forums with providers and data returns. While the regulations were generally seen as appropriate in preventing pension scams, there were some concerns:

• The overseas investment amber flag needs clarification or removal.
• The interpretation of incentive flags varies among providers, potentially causing unnecessary delays.
• Longer processing times due to additional due diligence checks and increased waiting times for MoneyHelper appointments.
• Individuals are required to attend multiple safeguarding appointments even for consolidating schemes.
• Excessive evidence requirements for an employment link.

In summary, the DWP’s review highlights that the majority of pension transfers occur without red or amber flags. However, it also underscores the importance of addressing concerns within the industry, such as the need for clearer definitions of certain flag types and reducing unnecessary delays. Striking the right balance between protecting consumers and ensuring efficient transfers remains a priority.

The DWP plans to collaborate with the pensions industry and the Pensions Regulator to explore potential regulatory changes that can enhance the pension transfer experience without compromising the overarching goal of preventing scams. It’s a delicate task, but one that aims to protect the interests of pension savers while streamlining the process.