Thousands of pension transfers are being held up unnecessarily by providers who are raising flags for transfers that have no real scam risks, according to new analysis.
Industry data from XPS Group, a pension consultancy, shows that over the last few years there has been a significant increase in the percentage of red and amber flag warnings they have raised in respect of pensions transferring out of pension schemes administered by XPS - with 94% of cases reviewed raising at least one scam warning flag. However, analysis of Government data by PensionBee, a leading online pension provider, suggests that there is no clear correlation between the number of flags raised and the number of scams.
Government data published in 2023, which analysed a total of 290,000 pension transfers found only 2,700 (1%) had a scam risk flag raised. Of the 2,400 that had an amber flag raised, the overwhelming majority (96%) went on to complete, whereas only 4% of these did not.
The data showed that the most likely reason that amber flagged transfers did not complete was because not all of the information was provided, rather than because evidence of a scam was found. The most common reason reported by customers for an amber flag to be raised was that overseas investments were present in the receiving pension scheme. However overseas investments are overwhelmingly present in all pension funds available in the UK.
The same Government data showed that just 300 of 290,000 transfers resulted in a red flag and that the most common reasons given for red flags were the member failing to provide the required information (47%) and the member not providing evidence of receiving MoneyHelper guidance (26%).
The Conditions for Transfers Regulations 2021 legislation does not appear to have had a marked impact on the number of pension fraud cases, with the number of reports increasing between 2022 and 2023. There were 559 reports of pension fraud not just in relation to transfers in 2023, according to Action Fraud, with losses totalling £17.7 million and an average loss of £46,959. In 2022, 420 victims were reported to Action Fraud with an average loss of £21,000. In 2021, 674 victims were reported with an average loss of £15,000. In addition to transfers, pension fraud can also involve free pension reviews, investment opportunities and early release inducements.
Action Fraud data on pension fraud since 2021-2023
| Number of reports of fraud | Average loss | |
|---|---|---|
| 2021 | 674 | £15,000 |
| 2022 | 420 | £21,000 |
| 2023 | 559 | £46,959 |
Source: DWP Action Fraud
Becky O’Connor, Director of Public Affairs for PensionBee, said: “The anti-scam legislation as drafted has been left open to misinterpretation and misapplication, hampering the proper functioning of the pension transfer market to the detriment of consumers, in far too many cases.
“It is of course important to stop real pension scams and the DWP legislation will have helped in some key cases. However the DWP’s own data indicates that a sledgehammer has been used to crack a nut, as the vast majority of red and amber flags that occur are not raised because of genuine scam risk but for other activity that on balance, is unsuspicious, such as people not providing the correct information or the mere presence of overseas investment in the receiving scheme where this is generally the norm.
“The number of flags raised should only be considered meaningful alongside data on the actual number of pension transfer scams that take place over a time period as a way to demonstrate how effective and proportionate the system is at identifying scam attempts.
“We have now had an extended period of time for the current anti-scam legislation to bed in. Recent years have shown no correlation between the number of flags raised and the number of actual transfer scams occurring. This suggests the current flag system does not effectively identify scams. Some providers feel they are being forced to apply flags in inappropriate circumstances. Other providers are slavishly applying the flag rules to the greater bulk of their transfers out as an excuse to slow or stop the transfers happening. These practices waste the resources of providers and the time and goodwill of savers trying to do something positive with their pensions.
“It is now time to make some much-needed amendments to tackle the huge inefficiencies, unnecessary worries and consumer detriment created by false flags.”
