Articles - Pension Scams the industrys biggest problem

 By David Brooks, Technical Director Broadstone

  

 It is in this fertile ground that pension scammers have been able to proliferate and grow.

  

 Some scams facilitate illegal payments that contravene HMRC’s rules so when the member is later defrauded out of any remaining funds they’ll also be stung with tax charges of up to 55% of the payments they’ve received. And what constitutes a scam? In some cases pension transfers made to a “legitimate” scheme have unregulated underlying investments and so members risk losing some or all of their money – raising questions around the legitimacy of such schemes.

  

 Pension scams,” trust busting”, pension or investment fraud and theft are not new to the world of pensions. Scammers have preyed on people’s pensions savings for many many years, however, the methods used are becoming more sophisticated and the tools needed to combat them must also change.

  

 The Regulatory Responses
 The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) have run various campaigns over the years to ensure people are “Scam Smart” (FCA) and tried to increase awareness of the risks of transferring to a scam scheme through the Scorpion campaign (TPR).

  

 In August 2018 these campaigns were combined with a revamp to the checklists and warning notices that should be issued to members. There were also television adverts to warn people of the risks of scammers. (All accessible here.)

  

 The Government responses
 Pension Cold Call ban
 The Government and industry have long called for a ban on pension cold calling. This has had a number of false starts as the Government looked to ensure they did not restrict legitimate business through a cold calling ban. Legislation is (at the time of writing) out for consultation and is due to be made into law in late 2018/early 2019 depending on Parliamentary time.

  

 It is worth noting the cynic’s point that the cold call ban won’t stop the practice. That is almost certainly true. Those that defraud people of their life savings are not likely to pay much heed to this. However, the key point is that it needs to be understood that any unsolicited approach to review your pension or otherwise should be rejected as it is almost certainly unlikely to be in your best interest. It should be held in the same regard you hold the unprompted offer at your front door to re-pave your drive.

  

 HMRC rules on registration
 One of the reasons “dodgy” schemes have been able to grow is because the rules concerning the registration of schemes was relaxed and so many schemes that perhaps shouldn’t be registered are given the veneer of respectability by having a Pension Schemes Tax Reference number. The Government is consulting on rules to make registration harder and to make it easier for HMRC to de-register schemes with suspect legitimacy.

  

 Potential changes to the definition of statutory transfer
 The Government is also tightening up the rules on when a legal right to transfer arises. This will involve the redefinition of when a member is deemed to be in employment linked with an occupational scheme. This would address the issues raised by Hughes vs Royal London and so allow Trustees to block a transfer where there is no clear employment link.

  

 These regulations remain out for consultation.

  

 What should Trustees and employers do?
 Trustees and employers are in a difficult position as they have a duty to comply with member’s wishes and rights under the law, and also under the rules of the pension scheme.

  

 The key role that the Trustees and employer can play is to inform members of the risks posed by scammers to their pension savings. The regulators have resources that can be used and regular member and staff communications are the ideal place to include reference to some of the key red flags and sources of support for members should they have concern or wish to source financial advice. A recent pensions ombudsman case (where the member was scammed and since been reinstated in the scheme as they didn’t effectively warn him of the risks of transferring) has highlighted the importance of engaging with members in the lead up to retirement. Trustees and employers should also familiarise themselves with the voluntary scam prevention Code of Practice drafted by the industry.

  

 Can the Government go further?
 Yes it can and it should. The statistics given by the Regulators highlight the financial loss experienced by many people and this is likely to be the tip of the iceberg. We haven’t yet addressed the blight of overseas transfers and the scaremongering tactics of those who wish to sell risky investments that will result in high charges and financial loss. I’ve got a short hit list of things which will help reduce the scams:
 1. Reintroduce the requirement to have a pensioner trustee on all SSASs. This person should pass the fit and proper test of all Trustees.
 2. Tighten up the rules to all transferring schemes to refuse the transfer if they believe the receiving scheme is a scam.
 3. The Regulators should, in conjunction with HMRC, undertake a review of all pension schemes to ensure they are bona fide schemes.
 4. Larger fines and sentences for perpetrators – with naming and shaming.
 5. A public black list sent to trustees and pensions managers warning of schemes & advisers to avoid.
 6. Greater international co-operation to clamp down on overseas advisers, cold callers and scammers.
 7. Unregulated investments (if not banned) then should require greater regulation at the advice stage via the FCA.
 Criminals will break the law but the Government and regulators need to create a toxic space for them to inhabit not a fertile one.