Two well intentioned consultations from DWP and FCA have widespread support, tackling the crucial issues of scams and uptake of guidance. But as they are taken forward, they should avoid making regular pension transfers clunkier and slower.
The first is the pension transfer regulations, which limit the statutory right to transfer to combat scams. This addresses a court ruling from 2016 which left pension providers in limbo and customers exposed and goes further by introducing red and amber flags as signals of suspicious transfers. These flags are really welcome and will enable providers and schemes to take stronger action: either direct the customer to guidance from the Money and Pensions Service, or stop the transfer altogether.
The regulations also include what is effectively a list of safe types of pension. Representing mainly insurers, clearly we’re glad that insurers are on that list. But that is not the right place to draw the line, as it excludes safe mainstream personal pensions which receive many, or maybe most, transfers in. There are a number of ways this could be fixed in the regulations, including: expanding the list; only applying the list to occupational schemes like master trusts that do not need to prove a link to an employer; or doing away with the list altogether, and relying on providers’ due diligence. DWP, to its credit, is working quickly to deliver the regulations and is open to views on making it work.
The second proposed policy is the ‘stronger nudge’ to Pension Wise being consulted on now by the FCA with an equivalent to follow from DWP. We also support the aims of this policy and our members were involved in a trial to evidence its impact (a fourfold increase in Pension Wise uptake, from a rather low base). It means that providers must direct customers to guidance, even when they have taken regulated financial advice, either before they access their pension or before they transfer with a view to taking benefits.
It’s the latter requirement that causes concern, and it’s not clear why Defined Contribution transfers are in scope. Customers transferring pensions were not included in the trials, so there is no evidence to back it up. The reason transfers are included at all is that concerns about Defined Benefit transfers were particularly high when the Financial Guidance and Claims Act was passed to introduce the stronger nudge. The ABI’s briefings during the Bill’s passage highlighted the risk of holding up regular transfers, and we were told there would be exemptions – but we are yet to see any.
Requiring a stronger nudge would put the transfer on hold, interrupting a customer experience that they might only go through a few times in their lives. It would also mean that a customer receives the nudge at least twice for every pension they consolidate. Whichever way a transferring customer might access their DC pension, they will either have been through the stronger nudge process with their current provider or will go through it with their new provider. It is unnecessary to do it again during the transfer process. If there are concerns the receiving scheme is a scam, it will be caught by the transfer regs. Policyholders who have taken financial advice and are consolidating their pensions as part of a deliberate strategy will also be caught by these proposals. The policy should be focused on those who would benefit from the guidance and should not be introduced as a one-size-fits-all barrier to every pension transfer for the over 50s.
The ABI is very much in favour of exploring ways to prompt take-up of impartial pensions guidance and engage people in retirement decisions. Consolidating pensions, or starting a new pension age 50+, could be a good opportunity to do this, because by definition customers who do this are thinking about their pension and taking action. But the backstop nature of the stronger nudge would mean it would unnecessarily hold up transfers.
These two consultations follow another earlier in the year about increasing the normal minimum pension age, which would also have unintended consequences, including delaying and complicating transfers. ABI data shows there have been over 200,000 policies transferred by customers aged 55+, consistently every year since April 2017. With this volume of transfers, it’s critical that the straightforward ones aren’t held up.
The industry has made substantial progress in improving transfers for customers, and current government policies depend on seamless transfers: consolidation of schemes will require bulk transfers to take place seamlessly; a purpose of pensions dashboards is to find and consolidate lost pensions; and automatic transfers are intended to tackle small pots accrued through automatic enrolment.
These consumer protection measures are welcome, but it’s important to get them right for all customers, for effective policy, and for the efficiency and reputation of pensions.