The government has announced a change in law in June 2022, requiring trustees to strongly ‘nudge’ scheme members towards financial advice and even book appointments for them, whenever they request transfers of, or access to, their pensions. The aim is to reduce the risk of members falling victim to pension liberation scams, but it will require a lot of changes to pension scheme processes. While the advice to members will be free (via the government service PensionWise), compliance with the new law will not be free for pension schemes and some are worried the costs could be significant.

What is the problem?

Pension liberation scams (scams in which all or part of a member’s pension is stolen by a scammer persuading a member to access their pension pots or transfer their pot to a scheme controlled by the scammer) have been growing every year for the last 15. This was exacerbated by Covid-19, as many pension scheme members were more eager to make changes to maximise their pension returns post pandemic, and as a result, were more susceptible to scammers. These scams can have a devastating impact on members who lose substantial sums of money (often when they are close to retirement when most changes to pensions and transfers are made). The government set up PensionWise (a free advice service for members) in 2015 to combat this and consulted on draft regulations to require trustees to nudge members towards PensionWise in July 2021. As of 17 January 2022, the government has confirmed that the regulations will come into force on 1 June 2022, in a move it hopes will halt the trend of growing numbers of scams.

What will the new law require?

Legislation currently in force requires trustees or managers of all occupational pension schemes to prompt members into talking to PensionWise. The new regulations will require those trustees to provide a ‘stronger nudge’, which will involve offering to book an appointment with PensionWise for the member if being contacted by phone or in person, or providing PensionWise contact details and instructions on how to book appointments to the member if being contacted by post or online. Trustees will have to do this every time a member who is over the age of 50 asks to receive flexible benefits or to make a transfer of their pension pot (or any part of it) or asks for a transfer or flexible benefit quote.

For these new requirements, the member is treated as having asked to receive flexible benefits or a transfer if they write to the trustees to ask for this, regardless of whether the request was made by a formal application. Trustees will then have to keep a track of which members have accessed PensionWise, organising further appointments/providing further instructions to make appointments for those who have not accessed it. Trustees can rely on members telling them they have used the service without further checks, but cannot assume they have just because an appointment has been made or the details passed to the member. Members are free to opt out of this nudge, using new opt-out forms that the trustees must provide members with.

What does this mean for pension schemes?

The biggest concern for all occupational pension schemes will be the cost of complying with this new law. Schemes and their advisers (most likely their administrators) will have to either change existing systems or put new ones in place, so that the relevant member communications are flagged to trustees. Trustees or administrators then need to act on these flags by booking a PensionWise appointment or forwarding details, and in cases of non-attendance, booking follow-up appointments/providing further instructions. Schemes will also have to provide opt-out forms, and monitor and log members’ attendance of appointments/receiving of advice, as well as logging members who opt out of the service, all of which will incur further costs which some responses to the 2021 consultation felt could be significant.

The government did take some cost concerns raised in the consultation into account. For example, the draft regulations required appointments to be set up for all members without exception. The final regulations have allowed trustees to send contact information and instructions to those contacted by post or online.

The final regulations will also not require the nudge to be delivered by trustees of both transferring and receiving schemes during transfers of benefits. This change from the draft regulations’ requirements will reduce the burden on schemes.

Additionally, the stronger nudge requirement is not triggered if the transfer is for the sole purpose of consolidating benefits into one scheme, rather than accessing them flexibly which may cut costs and prevent any barriers to consolidation, which the government is keen to promote. Of course this may simply move the focus of scammers so the exception may not be long lasting if that turns out to be the case.

However, scheme costs will still be higher than they are currently, and the new systems will have to be put in place soon as compliance is required from 1 June 2022. This means schemes and their trustees and advisers need to start planning now.