The government’s proposed employment-link red flag for pension transfers is “fundamentally flawed” and could still allow high-risk transfers to proceed, the Society of Pension Professionals (SPP) has warned.

Responding to the Department for Work and Pensions’ (DWP) consultation on amendments to the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021, the SPP welcomed plans to simplify low-risk transfers but said a legislative loophole could undermine protections relating to small self-administered schemes (SSAS).

The government has proposed introducing a new red flag in which a member supplies all the evidence requested to demonstrate an employment link to an occupational pension scheme, but the evidence does not establish that link.

However, the SPP warned that members often cannot provide complete evidence, including in legitimate cases where an SSAS was established many years ago, contributions are no longer being paid, or the member is a company director who does not receive a salary.

Under the current regulations, a “substantive response” can consist of only part of the evidence requested.

The SPP suggested this could allow a member or adviser to argue that part of the employment link had been demonstrated, meaning the case would be treated as an amber flag rather than a red flag.

The transfer could then proceed once the member had attended a mandatory MoneyHelper pension safeguarding guidance appointment.

The SPP said the proposed red flag would therefore be ineffective unless the government also amended the definition of a substantive response or revised the red flag itself.

One option would be to exclude partial employment-link responses from the definition of substantive response when the receiving arrangement is an SSAS.

However, the SPP cautioned that any change should not prevent legitimate transfers into occupational schemes where an employment link could not be fully evidenced.

Examples could include deferred members transferring into a former employer’s scheme, active members without three months of payslips and workers earning below the lower earnings limit.

The organisation also suggested that the DWP consider a more principles-based alternative, under which trustees or managers could allow a transfer where they had reason to believe the receiving arrangement would not be used to facilitate a pension scam.

It said this could be supported by a non-exhaustive list of risk factors in guidance from The Pensions Regulator (TPR), allowing the approach to adapt as scam tactics evolved.

Despite its concerns over the employment-link proposals, the SPP strongly supported plans to broaden the first transfer condition to cover schemes considered 'reputable'.

The existing first condition enables transfers to certain authorised arrangements to proceed without the checks required under the second condition.

The SPP said expanding this gateway could give stronger legal footing to the 'clean lists' already used by many trustees and administrators, accelerate transfers where there was no apparent risk of a scam, and reduce unnecessary referrals to MoneyHelper.

However, it argued that the decision on whether a receiving scheme was reputable should remain subjective and optional for transferring trustees.

Meanwhile, the response also raised concerns over the government’s proposed 12-month exemption from repeat MoneyHelper guidance appointments.

Under the proposal, a member who had attended a guidance appointment during the previous 12 months could be exempt from attending another session for a later transfer request.

The SPP said this exemption was too broad, as the subsequent request could involve a different receiving scheme, investment proposition or set of pressure tactics, while the member’s circumstances may also have changed.

It argued that the exemption should be restricted to repeat transfers involving the same receiving scheme.

It also called for further clarification of the incentives red flag, arguing that the subjective nature of what constitutes an incentive continued to lead to inconsistent decisions, disputes, and complaints.

SPP council member, Faye Jarvis, noted the broader reputable-scheme gateway should help accelerate lower-risk transfers, although clear regulatory guidance would be needed.

“At the same time, we are seriously concerned that the new employment-link red flag is fundamentally flawed," she continued.

“In practice, members often cannot provide complete documentation for a range of legitimate reasons, and under the current definition of a ‘substantive response’, partial evidence will still allow high-risk transfers to proceed as amber flags.

“Without closing this loophole, the proposed regulations will not provide the robust safeguards that pension savers need.”

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