The Government is consulting on new rules that mean that trustees will be able to block transfers when a suspected scam is involved. At least that’s what the headlines say, and that has to be positive from the perspective of protecting members, but what does this mean for trustees of pension schemes?
There is no doubt that pension scams ruin lives. As well as the financial impact there’s a heavy emotional one. However, until now, most transfers have been carried out under the member’s statutory right to do so, under powers originally introduced in 1988 to allow members the freedom to transfer to other arrangements, including the newly-introduced personal pensions and that now, in the era of scams, leave trustees with little option but to allow a transfer to take place, even when a scam is suspected.
This right has been abused by scammers who have preyed upon the vulnerable and unwitting with promises of unrealistically high investment returns, or being able to circumvent those pesky pension rules like not being able to access your funds until age 55 at the earliest. There can even be promises of a tempting lump sum, all for the simple act of transferring pension benefits from some fusty final salary pension scheme to some alluringly glossy pensions utopia, sometimes far from the reach of the UK regulatory regime. The pensions industry has, for many years, been calling for greater powers to allow trustees to block transfers where a scam is suspected to be involved.
The new rules state that members will effectively only have the right to transfer where one of four conditions are met. Whilst the intention is positive, we believe that as things stand, some loopholes exist that could easily be exploited (and you can see our comments on them here).
Regardless of what the final regulations look like, it’s clear that trustees should be getting ready now for the final regulations being announced and implemented in Autumn 2021. Ensuring that one of the four conditions is met will cause challenges both for trustees and their administrators – members will be upset if trustees tell them they can't transfer to their requested destination, but also they will be really upset if they are allowed to transfer and then it turns out it was a scam. It also seems possible to us that the Pensions Ombudsman may well direct trustees to reinstate a member’s benefit rights if they have paid out to a scam where there was a perceived failure in due diligence. This could be very expensive for the scheme (and the sponsoring employer).
It is clear that any new rules will necessitate changes in how trustees and their administrators interact with members when it comes to transfers and also that the new rules will bring about changes to administration processes and procedures. Trustees should therefore start conversations with administrators as soon as possible to ensure that processes, procedures and communications are being reviewed to see what changes will be required when the regulations come into force.
Scammers won’t stand still and will already be looking at ways to get round these new rules. It’s important that trustees and administrators are ready to implement these new regulations promptly as they are finalised, as regulators will undoubtedly be expecting processes, procedures and communications to be ready very quickly once the regulations come into force later this year.
So whilst we applaud the policy intention, trustees shouldn’t underestimate the work needed to ensure effective implementation of the new rules in a way that mitigates their own risks. And trustees should expect to see an increasing number of transfer-related decisions on their agendas.