Corporate report

Review of the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (SI 2021/1237)

Published 21 June 2023

What were the policy objectives of the regulations?

Background to the regulations

Fraudsters and scammers often promise high returns and low risk to entice individuals to transfer their pension savings. Pension savers who are victims of scams are usually left with nothing. Often it takes a considerable length of time for savers to realise they’ve been scammed, and the effects can be devastating – many lose their life savings. Once the money is gone, it’s almost impossible to get it back.^{[footnote 1]}

Following the Pension Scams consultation in 2016 ^{[footnote 2]} the Government set out 3 interventions aimed at tackling different aspects of pension scams:

• a ban on pensions cold calling

• limit the statutory right to transfer to some occupational pension schemes; and

• making it harder for fraudsters to open pension schemes

The ban on cold calling and rules making it harder for fraudsters to open pension schemes were introduced in January 2019. Whereas it took longer to introduce the limit to the statutory right transfer, as primary legislation was required.

Following the introduction of the Pension Schemes Act 2021 the Department for Work and Pensions (DWP) launched, in May 2021, a public consultation; Pension Scams: Empowering Trustees and Protecting Members. The consultation sought views on the draft Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021, which would introduce the conditions to limit the statutory right to transfer.

These regulations deliver on the final commitment in the 2017 consultation response. The regulations created conditions which must be satisfied before a statutory transfer can take place, giving trustees and scheme managers power to act where they have concerns about a transfer. They are intended to provide a safeguard against scams, whilst continuing to enable the majority of transfers to proceed without undue delay.

There was considerable interest in the original clause of the Pension Schemes Bill 2019. The clause, as it was originally drafted, sought to limit the statutory right to transfer by requiring:

• the demonstration of an employment link, if transferring to an occupational pension scheme (OPS), or

• evidence of residency if transferring to a Qualifying Overseas Pension Scheme (QROPS)

Key stakeholders, including Parliamentarians, felt that the clause did not go far enough to provide protection against the methods being used by scammers. Through discussions with the pensions industry DWP developed measures to address these concerns. The measures retained the spirit of the clause, whilst introducing the inclusion of other scam indicators, known as the red and amber flags.

The red flags are circumstances where the pension industry believe there is a significant risk of a scam, for example, unsolicited contact to persuade someone to transfer. Amber flags are where the pensions industry believes there may be a risk, but equally the circumstances could be legitimate, for example, fees being charged by the receiving scheme are unclear or high.

Purpose of the Review

DWP was clear with industry that the red and amber flags would be in secondary legislation to enable them to be amended quickly if the need arose. As such DWP had always intended reviewing the operation, appropriateness, and effectiveness of the regulations, including whether there was a need to amend the red and amber flags, based on changes to scammer methodology.

In addition, DWP in their response to the Work and Pensions Select Committee’s (WPSC) Pension Scams report ^{[footnote 3]}, agreed to publish a review of the legislation within 18 months of the regulations being operational. This is to ensure that they are working effectively and giving the maximum protection for pension savers.

The review was based on the following 3 principles:

• Are the regulations effective?
• Are there any unintended consequences of this legislation?
• What does the pension fraud landscape look like following the new legislation and as such are the red and amber flags still appropriate?

The Pensions Regulator (TPR) Guidance

To support the introduction of the regulations, The Pensions Regulator (TPR) issued guidance on 8 November 2021.

The guidance is for trustees, pension managers and administrators on making checks and undertaking due diligence on transfer requests.

TPR has been responsive to industry feedback and has updated guidance on 2 occasions:

1. Following feedback from industry regarding the incentives red flag a joint statement was issued by DWP and TPR and the guidance was updated on 5 July 2022.

2. A further amendment to guidance was published on 12 January 2023^{[footnote 4]}. The guidance provides trustees, pension managers and administrators with details on checking, proceeding with and refusing transfer requests from scheme members.

In general, the pensions industry has welcomed the updated guidance as a reminder of the purpose of the Regulations in preventing pension scams.

Engagement with pensions industry

DWP wanted to understand how the regulations were working in practice for schemes representing both trust and contract markets. As scammers are becoming more resourceful, it is not unreasonable to assume they would look for ways to circumnavigate the regulations to continue to scam individuals. The pensions industry, as those who engage regularly with pension savers are in a unique position to help DWP understand quickly if the regulations are efficient, and whether new types of scams are being identified.

The 18-month review involved participation from pension providers and administrators, legal firms, professional bodies, industry groups and regulators.

In conjunction with the return of data capture templates DWP held quarterly sessions with those providing data and held ad hoc conversations with others throughout the period.

Reviewing the effectiveness of the regulations:

DWP launched a data sharing exercise with a number of pension schemes and administrators to gather data and feedback on the effectiveness of the transfer regulations. Over 20 such pension schemes, administrators and industry bodies took part in the 18-month review, 11 of which provided data returns that have been aggregated for this review.

The total memberships of the 11 providers and administrators that took part in the data exercise is over 10 million members^{[footnote 5]}. The memberships cover both the Defined Benefit (DB) and Defined Contribution (DC) markets offering important, emerging insights. However, reflecting that there are at least 58 million pensions^{[footnote 6]}, the data may not be representative of the entire pension industry and total transfers, particularly across smaller schemes.

Data was collected from 1 January 2022 to 31 December 2022 across 4 calendar quarters, covering approximately 290,000 completed transfers.

Completed transfer breakdown

A transfer is complete when the transfer request is closed – meaning the transfer has either gone ahead or it has not gone ahead and will not go ahead. Transfers that are still being processed and the outcome is yet to be determined are not included in this review.

During this period:

• 94% of transfers were completed under condition 1 or condition 2 where no flags were present
• 5% of transfers were completed outside of the regulations (contractual or discretionary transfer)
• 1% of transfers were completed with a red or amber flag present^{[footnote 7]}

The first condition is satisfied where the trustees or managers of the transferring scheme satisfy themselves that the receiving scheme is one of the following:

• Public Service Pension Scheme
• Master Trust or
• Collective Money Purchase

The second condition applies to all statutory transfers that are not covered by the first condition and places a requirement on all schemes to decide whether red and amber flags may be present.^{[footnote 8]}

Although a very low proportion of reported transfers were completed with a red or amber flag present, it must be noted that the proportional breakdown on an aggregate level isn’t representative of what every provider or administrator is experiencing. Some providers are processing close to 99% of their transfers through condition 1 or condition 2 where no flags are present whilst others are processing less than 20% this way. The aggregate data is likely to be skewed towards larger providers and administrators.

Transfers requiring further information / consideration

Some data returns were unable to distinguish between condition 1 and condition 2 transfers where no flags are present. Therefore, to estimate the proportion of transfers that require condition 2 due diligence checks, returns without this information are not included in this analysis.

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

• 83% were completed under condition 2 where no flags were present
• 12% were completed as a contractual or discretionary transfer
• 3% were completed as a condition 1 transfer
• 2% were completed where an amber or red flag was present

Therefore, the proportion of transfers that currently receive condition 2 due diligence checks is approximately 85%.

Amber flags

From the 290,000 transfers, 2,400 transfers were given at least one amber flag. 96% of these transfers did proceed to transfer whilst 4% did not.

The 3 most common amber flags were^{[footnote 9]}:

• ‘Overseas investments are included in the scheme’ (57%)
• ‘High risk or unregulated investments included in receiving scheme’ (15%)
• ‘The scheme charges are unclear or high’ (10%)

The transfers with amber flags that were less likely to proceed were^{[footnote 10]}:

• Incomplete evidence/information provided (12%)
• The scheme charges are unclear or high (10%)
• Evidence not genuine/not provided directly (7%)

DWP have also been working closely with the Money and Pension Service to collect further insights from pension safeguarding appointments. Data shows that between December 2021 and February 2023, there were over 12,600 pension safeguarding appointments.

The most common flag types reported by customers were^{[footnote 11]}:

• Flag type is unknown to attendee (43%)
• ‘Overseas investments are included in the scheme’ (37%)
• ‘The scheme charges are unclear or high’ (10%)
• ‘High risk or unregulated investments included in receiving scheme’ (5%)

Red flags

From the 290,000 completed transfers, 300 transfers were given at least one red flag.

The 3 most popular red flags were:

• ‘The member has failed to provide the required information’ (47%)
• ‘The member has not provided evidence of receiving MoneyHelper guidance’ (26%)
• ‘Someone carried out a regulated activity without the right regulatory status’ (17%)

Qualitative feedback

DWP received additional feedback during the quarterly forums with providers and in the data returns. Overall, pensions industry feedback suggests that the original policy intent of preventing or minimising the risk of someone transferring into a scam pension scheme remains appropriate and in general the regulations are the way to deliver that. Feedback also suggests that there has not been a change in scam typology. However, some feedback has suggested that there are some areas of concern. This included:

• The overseas investment amber flag needs to be more clearly defined or removed. As it is structured it can mean that an amber flag needs to be raised, even when schemes have no concerns.
• The incentives flag is incorrectly blocking transfers due to the different interpretation of the flag by some providers.
• Transfers are taking longer due to the additional due diligence checks required and longer waiting times for MoneyHelper appointments.
• Several individuals are required to attend multiple safeguarding appointments, even if they are consolidating because individual schemes are identifying flags.
• Evidence requirements for an employment link can be excessive on pension members.

Review of original impact assessment assumptions

Original business impact estimate

The impacts on business were dependent on the level of due diligence already being conducted in relation to transfer requests, which was a requirement prior to the regulations. It was assumed that 50% of schemes and therefore 50% of transfers will have had to carry out additional information collection from members transferring as a result of the regulations. DWP estimated the Equivalent Annual Net Direct Cost to Business (EANDCB) to be approximately £3.2m.

Original pension saver impact estimate

It was estimated there would be a cost to members to provide the relevant information required for a transfer.

It was estimated that by stopping pension scams for a small minority of pension scheme members, they would benefit from retaining on average, £91,000 in their pension pot. This figure, calculated by Action Fraud, is based on a total of 253 victims reported to Action Fraud that they had lost more than £23m to pension scammers in 2017.

DWP considered the potential detriment to the member incurred from a delay in their pension transfer as acceptable if it prevents them making an irreversible decision of losing their life savings from a scam or unsuitable high-risk investment product.

Original scale of impact estimate

It was estimated that approximately 470,000 transfers per year would be impacted by these regulations. This was based on data from Origo^{[footnote 12]} and TPR.

Pension Scam Industry Group research suggested that around 5% of transfer requests showed signs of scam activity based on a small survey in 2018.^{[footnote 13]}

Review of business impact estimate

Although feedback from industry suggests that there are some challenges with the regulations, the data shows that very few (1%) of transfers had an amber or red flag present- suggesting that there has not been a disproportionate cost to business following the implementation of the regulations.

Review of benefit to pension savers from preventing scams

Due to delays in members reporting a scam, we do not expect the regulations to have directly impacted the number of reported scams at the time of writing this review. We can however review our initial benefit estimate using the most up to data Action Fraud figures.

The latest figures, which refer to scams that occurred prior to the regulations, show that the number of victims per year have increased since 2017 but the average reported loss per victim has reduced. In 2021, 674 victims were reported with pension fraud on pensioners or pension liberation fraud at an average loss of £15,000 per victim. In 2022, 420 victims were reported to Action Fraud with an average loss of £21,000^{[footnote 14]}. Not every scam victim reports their scam and so this is likely to be an underestimate of the number of victims

Between December 2021 and February 2023, the Money and Pensions Service carried out over 12,600 pension safeguarding appointments. By applying the proportion of transfers that do not go ahead after an appointment from the data collection (4%), it is estimated that approximately 500 transfers have been stopped following an amber flag appointment.

If we apply the ratio of transfers with amber flags to those with red flags from the data collection to the number of pensions safeguarding appointment (for every 4 transfers stopped, 3 are due to a red flag whilst 1 is due to an amber flag), we estimate approximately a further 1,500 transfers have been stopped after receiving a red flag^{[footnote 15]}. Using the 2022 average pension scam loss values, this would suggest that up until February 2023, the regulations had the potential to stop close to £40m worth of losses. However, we cannot say what proportion of this would have been fraudulent and is therefore likely to be an overestimate.

Review of requirements on pension savers

The data capture exercise shows that approximately 85% of transferring members are required to provide information to their provider to meet condition 2. The exercise does not provide insight into what proportion of these transfers would have been required to provide information as standard business practices before the regulations. However, no feedback has been received to suggest that the 50% assumption used in the original impact assessment underestimates the additional cost to business.

Review of number of transfers affected

The original impact assessment estimated there to be 109,000 DC occupational transfers, 147,000 DB transfers and 216,000 DC personal transfers to be impacted by the regulations, resulting in a total of approximately 472,000 transfers to be impacted by the regulations each year.

Since the original estimates, the number of occupational DC transfers have increased to 340,000 in 2022^{[footnote 16]}. Data shared by Origo shows that the total number of transfers completed by Origo increased to around 1 million in 2022 from 750,000 in 2020. Origo estimate that their total transfers represent approximately 95% of all contract-based DC transfers and approximately 80-90% of DC pension transfers in general. We do not have up to data information on the number of DB transfers.

It is therefore likely that the total number of impacted transfers has increased since our original impact assessment increasing the overall scale of impact of the regulations. The increase in transfers is likely due to the growing number of DC pots leading to greater consolidation of these pots.

Review of impact on transfer times

Data published by Origo shows that the average ceding days for a transfer has increased from 13.4 in 2021 to 14.0 days in 2022. ^{[footnote 17]} For simpler transfers, the average ceding days has increased from 11.3 days to 12.0 days. This is a 4% and 6% increase respectively. Prior to 2021, the average ceding days increased from 8.7 days in 2019 to 10.7 days in 2020. The regulations have therefore not had a significant impact on the average ceding days of transfers reported by Origo^{[footnote 18]}. However, it must be noted that not all providers use the Origo transfer service to process transfers and may have experienced differences in transfer times.

Feedback from industry suggested that there has been an increase in the waiting times for a Money and Pension Service pension safeguarding appointment mainly driven by the interpretation of the oversees investment amber flag. The waiting times for an appointment have on average increased from 2 to 6 weeks over the period of the regulations. There are 2 potential costs associated with additional transfer times. One is the impact on investment decisions, as changes in investments could occur during the additional waiting period. Although, this could also be a benefit if the value of investment increases due to the delay. The second is the time cost associated with additional personal waiting time. Costs associated with additional transfer times have not been estimated due to high uncertainty.

Review of potential transfers showing signs of scam activity

1% of transfers in the data collection exercise contained a red or amber flag. This suggests that approximately 1% of transfers show signs of scam activity.

In addition, transfer data suggests that there were at least 1.1 million transfer requests in 2022. At the same time, there were approximately 10,000 pension safeguarding appointments. If we assume that transfers with red flags are significantly less frequent than those with amber flags as shown by the results of the data sharing exercise, then this methodology would also suggest that approximately 1% of transfer requests show signs of scam activity^{[footnote 19]}.

Were there any unintended consequences?

Feedback from a proportion of the pensions industry suggests there are issues with the practical application of certain provisions in the regulations, namely the incentives red flag and the overseas investments amber flags.

Feedback also suggests that members may have to attend multiple appointments if they are consolidating.

These practical issues are likely to have increased the transfer times of a pensions safeguarding appointment. TPR has since updated its guidance to help address these issues.

To what extent have the policy objectives been achieved?

There is a consensus from pensions industry feedback that the original policy intent of preventing or minimising the risk of someone transferring into a scam pension scheme remains appropriate and in general the regulations are the way to deliver that. It is recognised that the regulations give trustees and scheme managers the ability to act where they have concerns, and it is estimated that the regulations have stopped approximately 2000 transfers taking place which may have been scams/fraudulent.

Feedback however suggests the practical application of certain provisions in the regulations, namely the incentives and overseas investments flags are causing delays and issues for pension savers, as well as the trustees and scheme managers.

There has been limited feedback on amber flags relating to high risk or unregulated investments and unclear or high fees being charged.

Some in the pensions industry have reported pension savers are having significant issues in so far as transfer requests being delayed or blocked due to the existing regulations.

To date the Pensions Ombudsman has received a small number of complaints, with most of these being in respect of blocked transfers where there has been a red flag. It is currently investigating one case in respect of an amber flag that has caused a delay to the applicant’s transfer.

Has the evidence identified any opportunities for reducing the burden on business?

No opportunities to reduce the burden on business have been identified as there are limited impacts on business.

Conclusions

Whilst the original policy intent remains appropriate, feedback from the pensions industry suggests the incentives and overseas investments flags are the main concerns with the application of the regulations.

DWP will therefore conduct further work with the pensions industry and the Pensions Regulator to consider if changes could be implemented to the regulations to improve the pension transfer experience, without undermining the policy intent.

1. The Pensions Regulator - Avoid pension scams ↩

2. Pensions scams: consultation ↩

3. Parliament.uk: Protecting pension savers—five years on from the pension freedoms ↩

4. The Pensions Regulator - Dealing with transfer requests ↩

5. One administrator was unable to provide the number of pension members they administer for and so the membership total is likely to be higher ↩

6. This includes DB, Trust-Based DC, Contract-based DC workplace and Contract-based DC non workplace. The Pensions Regulator - Driving Value for Money in defined contribution pensions ↩

7. Transfers that are flagged but are completed as a discretionary/contractual transfer are not classified as completed transfers with at least one amber or red flag present in this data return ↩

8. Explanatory memorandum to the occupational and personal pension schemes (Conditions for Transfers) regulations 2021 ↩

9. This methodology calculates the most popular amber flags using the total number of amber flags reported. Not every provider was able to provide data on the specific type of amber or red flags. ↩

10. This methodology calculates the proportion of transfers that did not proceed compared to the total number of transfers with that flag type ↩

11. Pension Safeguarding attendees may not answer the question accurately ↩

12. Origo is a financial technology firm. Their Origo Transfer Index measures pension transfer times. ↩

13. Acturial Post - New research from the PSIG uncovers depth of pension scams ↩

14. Since 2017, Action Fraud have improved their verification and data collection processes which may explain the reason for this change ↩

15. In the data collection exercise, approximately 100 transfers did not proceed after receiving an amber flag compared to 300 transfers that did not proceed after receiving a red flag. This suggests that for every 4 transfers that did not proceed following a flag, one is following an amber flag and 3 are after a red flag. The 100 transfers that do not proceed after receiving an amber flag equate to approximately 4% of all transfers with at least one amber flag. By applying this 4% proportion to the number of pensions safeguarding appointments (12,600), it is estimated that approximately 500 transfers do not proceed following an amber flag. By using the ratio of 3 transfers stopped after a red flag for every 1 transfer stopped after an amber flag, it is therefore estimated that approximately a further 1,500 transfers do not proceed following a red flag between December 2021 and February 2023. ↩

16. The Pensions Regulator - DC trust: scheme return data 2022 to 2023 ↩

17. Data refers to only transfers conducted via the Origo Transfer Service – for any product or transfer that an organisation deems to be not within the scope of the Origo Transfer Service, customers may have a different experience. ↩

18. Origo Transfer Index ↩

19. This methodology does not account for individuals with multiple referrals attending just one appointment ↩