Shifting sands: Consultation on changes to pension transfer conditions

The DWP has published a consultation on draft amendments to the pension transfer conditions regulations. This seeks to address issues with how the regulations work in practice. It also includes new measures designed to reduce the emerging risk of fraudulent transfers to some Small Self-Administered Schemes (SSASs). 

In a nutshell, the proposed changes:

1. remove the problematic overseas investment amber flag
2. enable transfers without additional checks to schemes that trustees satisfy themselves are “reputable”
3. exempt members from MaPS scam guidance where this has been taken in the past year
4. introduce a new red flag where evidence does not show an employment link with the receiving occupational scheme

Trustees and administrators should take note because the amendments are likely to require changes to transfer processes, in some cases making them smoother. Self-Invested Personal Pension and Group Personal Pension providers will also be interested in the extension of the safe harbour for transfers to “reputable” schemes, which may now include personal pension schemes operated by FCA authorised firms.

There is more information below on the proposed changes and what they mean.

Background

The current Regulations

The Occupational and Personal Pension Schemes (Conditions of Transfer) Regulations 2021 (the Regulations) came into force in November 2021. They introduced conditions that must be satisfied for a member to have a statutory right to transfer pension benefits to another scheme. Before that, trustees had very limited ability to withhold transfers even where there were concerns that the receiving scheme was a scam vehicle.

The “First Condition” under the Regulations allows transfers to certain “safe” schemes - a public service pension scheme, an authorised master trust or an authorised collective money purchase scheme - to go ahead without additional checks.

The “Second Condition” (which applies to transfers to all schemes other than those “safe” schemes) sets out scam risk indicators in the form of red and amber flags. Where the trustees of the transferring scheme conclude that any red flag is present, the transfer can’t proceed. If they decide there is an amber flag, the transfer can only proceed if the member provides evidence that they have taken scam-specific guidance from the Money and Pensions Service (MaPS).

For more on the current Regulations, see our previous briefing.

The industry has for some time been seeking changes to the Regulations to ease various issues with how they operate in practice, causing seemingly unnecessary barriers and delays.

The emerging SSAS transfer risk

SSASs are a special type of occupational pension scheme, typically established by owners of small or family-run businesses. Government research suggests that, while most SSAS providers are operating responsibly, there is a growing trend towards the misuse of SSASs. There are only around 100 transfers a year to SSASs but up to one in 10 of those is thought to be a fraudulent transfer with an average loss per victim of £38,400. The government wants to tackle this.

What changes are proposed?

The proposed amendments set out in the consultation are to:

• Reputable schemes – broaden the First Condition so that transfers can proceed where trustees are satisfied that the transfer is to a “reputable” pension scheme

The amending regulations are likely to include a non-exhaustive list of factors for assessing whether a scheme fits this description, including: an existing relationship, the nature of investments, prior warning flags/regulatory concerns and cost transparency.

• Overseas investment amber flag – remove the amber flag that currently applies where there are any overseas investments in the receiving scheme

This flag is often raised even when transferring schemes have no concerns. It is a frequent source of MaPS appointments, transfer delays and member complaints.

The DWP has concluded that the other requirements under the Regulations to assess whether the receiving scheme includes high risk/unregulated investments or complex/unorthodox investment structures provide sufficient member protection.

• MaPS guidance exemption – exempt members who have taken MaPS guidance within the last 12 months from repeating it when consolidating multiple pots

This aims to reduce unnecessary duplication and delays, and to improve member experience.

• Employment link red flag – introduce a new red flag where the evidence provided by the member fails to demonstrate an employment link between the member and the receiving occupational scheme. The transfer would not then be able to proceed

The DWP says a missing employment link is a strong indicator that a receiving SSAS may be operating outside its legitimate purpose. Note, however, that the new red flag would, as currently drafted, apply more broadly than just to SSASs.

Comment

Government estimates suggest that the Regulations have helped to prevent up to 2,000 transfers to scam vehicles. This is a great result but there have been unintended consequences: arguably unnecessary friction and delays for legitimate transfers. A 2023 DWP review of the Regulations identified a number of problem areas. It is good to see that many of those are now addressed in the consultation proposals.

We have been waiting for this consultation for some time. It is clear, however, from the detailed options assessment paper published alongside the consultation that the government has given significant thought to how best to deal with this.

Most of the proposed changes are welcome. They should allow many legitimate transfers to proceed more smoothly while reducing delays and unnecessary MaPS guidance appointments for members. Removing these existing frictions from the transfer process will be particularly important ahead of pensions dashboards going live. Dashboards are expected to accelerate consolidation activity, with more members likely to request transfers once they have easier access to information about their pension pots.

A notable area where the DWP has ruled out direct legislative change for now is in relation to incentives flags. Under the current Regulations, if the member has been offered an incentive to transfer, this is a red flag and the transferring trustees must block the transfer. There had been calls from the industry for this red flag to be removed because of uncertainty over what constitutes an “incentive” (a term not defined in the Regulations) and concern that in practice this is causing legitimate transfer requests to be blocked. While acknowledging that transfer incentives may form part of some legitimate business models, the DWP’s conclusion is that that incentives are still an important scam indicator. Removing or diluting the incentives red flag would in its view open up too much risk. However, widening the First Condition to include “reputable” schemes should help to ease transfers to many receiving schemes, even where they offer a transfer incentive.

Action points and next steps

The consultation is open for responses until 21 July 2026. The DWP has not said when the finalised changes will come into force but this could potentially happen within a few months.

Once the amending regulations are finalised, schemes and administrators will need to update transfer processes, including those around assessing employment links to receiving schemes, and consider updates to member communications. Work will also be needed in the interim (perhaps led at regulatory or industry body level) on approaches to determining “reputable” schemes.

The Pensions Minister has said this marks the first step in a wider government programme to tackle pension fraud. We can also expect to hear more this year on wider pension transfer issues such as how processes can be modernised.