"Some key concepts such as ‘high cost’ or ‘high risk’ are very subjective and trustees may not be well placed to make such judgments."
With the consultation on new measures to crack down on pension scams closing today, LCP have warned that although these measures are well-intentioned, they could fail to pick up some scams whilst allowing others through.
LCP argues that more guidance will be needed to make sure that the rules are applied consistently and generate maximum member benefit, rather than purely adding administrative cost and delay.
Under proposals published in May, pension transfers to approved destinations such as Master Trusts, FCA-regulated insurers or public sector schemes are regarded as ‘low risk’ and can proceed without further checks.
In other cases, members can still exercise their right to transfer if they satisfy certain additional checks, such as providing proof of an ‘employment link’ in the case of transfers to an occupational pension scheme.
If neither of these tests are met, the new rules would set out:
• ‘red flags’ which are features of the transfer which raise such serious concerns that the transfer ‘may not proceed’; these could include a transfer which was prompted by unsolicited sales activity or where there is evidence that the member was under pressure to complete the transfer quickly;
• ‘amber flags’ which are features which raise concerns but which may be addressed by further precautionary measures; these could include transfers to schemes deemed to be ‘high risk’ or ‘high cost’, or cases where a large volume of transfers has been made to the same destination; in these cases (and in the absence of any over-riding red flags) it will be necessary for the member to show that pensions guidance from the Money and Pensions Service (MaPS) has been obtained.
Whilst LCP share the goal of cracking down on pension scams, they express concern in their consultation response that it is unclear how some of the measures will work in practice and that the new process could have some undesired effects.
LCP says the features of a receiving scheme which would trigger an ‘amber flag’ are "highly subjective", asking what the threshold is for the receiving scheme investment to be categorised as ‘high risk’, and what would constitute such a high charge as to trigger an amber flag. Some receiving schemes could say that their charges are higher than average because the product is more sophisticated than average, and LCP is concerned that trustees "may not be well-placed to make value-for-money judgments of this sort".
LCP added that scammers can be highly persuasive and many people who turn out to have been scam victims were determined to transfer; trustees could be highly concerned about a destination scheme, and it could trigger several ‘amber flags’, but they would have no power to stop the transfer if there were no red flags and the member remained determined after talking to MaPS. This is a kind of ‘false negative’, where a transfer cannot be blocked under the new rules even if the trustees are convinced it is a scam.
Additionally, the evidence required to demonstrate an ‘employment link’ is simply a letter from the sponsoring employer of the new scheme. If the scheme is a scam, it would not be hard to falsify an ‘employer’ letter, so this may offer limited protection. Conversely, the ‘amber flag’ process could inadvertently capture legitimate but innovative investment approaches – a ‘false positive’.
Daniel Jacboson, senior consultant at LCP, said: “These new rules have been designed with the best of intentions, but we are concerned that they may not have the desired effect. Some key concepts such as ‘high cost’ or ‘high risk’ are very subjective and trustees may not be well placed to make such judgments. Unless further clarification is issued there is a risk of inconsistency as different trustees define these terms in different ways.
“There is also a risk of false positives – legitimate transfers being blocked – and false negatives – scam transfers being allowed through. We are especially concerned that trustees who have real concerns about a destination scheme will not have the right to block a transfer unless a narrow list of red flags is triggered. If a member only has to attend a MaPS interview to override trustee concerns this is likely to allow some scam transfers to slip through the net.”
