Rachel Vahey: DWP’s ‘anti-scam’ pension transfer rules are still too vague

In the latest political furore over banning under-16s from social media, I was struck by how quickly the government wants to move to introduce change.

From announcing the measure in mid-June – with, let’s face it, a lot of gaps on the finer detail – it wants to go live with the ban by spring next year.

If only all government change was that quick! Instead, some move at a far more glacial pace.

Take the changes to the ‘anti-scam’ pension transfer regulations. These rules were brought in back in 2021, and along with updating what makes a member’s statutory right to transfer, introduced the concept of trustees raising red or amber flags if they were concerned about the legitimacy of a transfer.

Flaws within the design were quickly pointed out, and, to be fair, acknowledged by the Department for Work and Pensions (DWP). But it has taken five years to now get the draft changes to the regulations.

The problem is, there have been a lot of pension transfers in those five years, many of which have been needlessly held up while trustees have raised flags, sending the pension saver for a guidance appointment with the Money and Pensions Service (MaPS).

Experience has shown us that some ceding providers have followed the letter – but not the spirit – of the anti-scam regulations

The DWP should now be praised for proposing some important improvements. Removing the need to raise an amber flag if the transfer is to a scheme offering overseas investments is a win for common sense. (Find me the pension scheme that doesn’t offer overseas investment!)

And streamlining the guidance appointment process so a member consolidating several pension schemes only needs one appointment (rather than one session for each transferring scheme) should make life easier, as well as alleviating the pressure on MaPS.

However, I remain frustrated at its proposed changes for ‘condition 1’ transfers. The regulations currently outline that where a pension transfer is to a master trust, a public-sector scheme, or a collective defined contribution (CDC) scheme, then it can go straight ahead without any further checks.

The problem is, many bona fide transfers to mainstream pension providers, such as platforms or GPPs, fail that condition, and then end up getting snagged on the requirement for trustees to consider red or amber flags.

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The DWP has proposed changing this condition to include a transfer to a “reputable pension scheme”. I think this is a huge improvement on the current position. But it’s not perfect.

Unfortunately, experience has shown us that some ceding providers have followed the letter – but not the spirit – of the anti-scam regulations, stopping or pausing many ‘legitimate’ transfers. To then introduce a subjective definition – one open to interpretation – worries me.

The DWP and The Pensions Regulator (TPR) will include in the regulations a non-exhaustive list of factors for trustees to consider. This may be useful, but they need to be drafted carefully to be really effective.

I would rather see this new addition to condition 1 widened to say “pension schemes offered by an FCA-regulated provider or other reputable pension schemes”.

A more concrete definition would leave little room for misinterpretation and so allow transfers to be proceed quickly

As an industry, we should be confident that FCA-regulated pension schemes are, by definition, reputable. A more concrete definition would leave little room for misinterpretation and so allow transfers to be proceed quickly.

There is no avoiding the fact that some FCA-regulated pension schemes have in the past had issues with allowing certain undesirable investments. But the rules surrounding pension investments are very different today compared to 15 years ago. And the FCA’s regulation of these schemes has correspondingly also changed and tightened in recent years.

To decide whether to include the definition of ‘FCA-regulated schemes’ in condition 1 based on the position and conversation of five years ago, when the original regulations were drafted, ignores the positive developments in this part of the pension market.

Maybe it’s time DWP acknowledged the improvements in regulation the FCA has brought about. By replacing any ambiguous definition now, we can make sure the amended regulations work well – rather than having to wait another five years to fine tune them again.

Rachel Vahey is head of public policy at AJ Bell