(Image Source: The Pensions Regulator)
“Corruption, embezzlement, fraud, these are all characteristics which exist everywhere. It is regrettably the way human nature functions, whether we like it or not. What successful economies do is keep it to a minimum. No one has ever eliminated any of that stuff.” Alan Greenspan (former Chairman of the Federal Reserve of the United States).
But it looks as though the Government is going to have a try at eliminating it…at least in terms of pension fraud.
It’s become an all too familiar story these days to read about members who have lost their retirement savings after being duped by scammers following cold calls and people turning up on their doorstep with transfer forms to complete.
But while many of us have wised up to the pension transfer fraud it seems that many are still being lured into signing away their retirement savings to investment vehicles with promises of eye-catching returns, but which deliver no returns or even eye-watering losses.
And there is often a dilemma for pension scheme trustees when it comes to transferring member benefits – they are torn between taking a paternalistic view and wanting to protect their members from potential fraudsters, and avoiding a charge of maladministration should a member or spouse come back years later and claim that the transfer should not, in fact, have taken place. So, it can be tricky for trustees who despite when their scheme administrators have undertaken a sufficient due diligence exercise may find that they have not been discharged from their duty to provide benefits under the scheme.
Now in a bid to help both members and trustees, HMRC and the DWP have launched a consultation proposing a series of restrictions on pension transfers to try to halt the rise in pension fraud particularly since the launch of pension freedoms in 2015.
The consultation proposes the following approach:
• Imposing a ban on pensions “cold-calling”
• Placing restrictions on a member’s statutory right to transfer their pension benefits
• Making it harder to set up potentially fraudulent small pension schemes (often a destination for pension scams).
Ban on cold-calling
It is estimated that there are some 250 million cold calls each year, equivalent to eight potential fraud attempts every second. A blanket ban on cold-calling will send out a clear message both to the public that no legitimate organisation will make cold-calls about pensions, and
to the fraudsters, as potential fines of up to £500,000 could be imposed by the Information Commissioner’s Office on any UK organisation breaching this ban. The government has outlined the sorts of telephone conversations that will fall foul of the ban which include: offers of a “free pensions review”, inducements to release pension funds early and promotions of retirement income products, such as drawdown and annuity purchase.
Restrictions on transfers
It is generally difficult to block a transfer even where it is suspected that an individual may be transferring to a fraudulent scheme, because the individual generally has a statutory right to transfer. Indeed the government has said in this consultation: “The government is regularly informed by firms and schemes that they are frustrated and concerned because they feel current legislation gives them little scope to refuse a transfer to a scheme that displays the characteristics of a scam, despite their legitimate concerns as to the safety of members’ savings.”
To avoid the blocking of legitimate transfers, the government has said that clear criteria are now needed on when a transfer could be blocked in future.
The consultation proposes that a statutory transfer would only exist where the receiving scheme:
• is a personal pension operated by a FCA authorised firm or entity;
• is an occupational pension scheme and the individual can prove a genuine employment link with evidence of regular earnings and confirmation that the sponsoring employer has agreed to participate in the receiving scheme;
• is an occupational pension scheme established as an authorised Master Trust.
Setting up fraudulent schemes
The government also wants to make it harder to open fraudulent pension schemes in the first place. There has been a trend recently towards the setting up of small tax-registered schemes that require no registration with the Pensions Regulator and which often use a dormant company as the sponsoring employer. The consultation proposes that only companies that are actively trading will be able to establish a registered pension scheme which the government hopes will prevent the use of these dormant or shell companies as a sponsoring employer for the purpose of registering a pension scheme.
The consultation closes on 13 February 2017 and so, at the time of writing, we await the outcome of this. Whether any of the measures finally introduced will make an impact remains to be seen. History tells us that fraudsters can always find a loop in the system.
Jemma Jurgenson
jemma.jurgenson@quantumadvisory.co.uk