SPC: Pot-follows-member a 'breeding ground' for fraud

In proposals published in April, the Department for Work and Pensions set out the details of its plan to consolidate small pension pots arising as a result of auto-enrolment, which include capping the size of transferable savings at £10,000.

But doubts have been raised about whether the industry can implement two major workplace pension reforms at the same time, especially given predictions of a provider capacity ‘crunch’ as rising numbers of employers reach their staging date.

Fraud experts have also warned members’ retirement plans could be “crushed” by the prospect of automatic transfers to arrangements that allow access to funds before a member reaches age 55, which can incur a tax bill of more than half of a pension pot.

The SPC sent a letter to pensions minister Steve Webb last week warning that the timing of the new system could have an adverse effect on auto-enrolment as it reaches a large spike in employer numbers in the middle of next year.

“There is a very significant risk of overstretch in asking the pensions industry to carry out the still very substantial amount of work needed to turn these proposals into reality while the automatic enrolment process is still at an early stage,” said the letter, seen exclusively by PW.

It went on to “strongly suggest a pause” in this area until after the anticipated capacity crunch. It also said the reprieve would enable the industry to “fully deal with current concerns on pension liberation fraud” for which consolidation at this crucial time could provide “a fertile breeding ground”.

There has been a marked increase in members being targeted for fraud, according to Karen Tasker, associate director in consultancy Baker Tilly’s pensions group. She agreed it would be wise to delay consolidation until pension liberation is brought under control.

“This would otherwise open a new avenue of temptation for fraudsters and could lead to many more members’ dreams of reaching a sound retirement being crushed,” she warned.

The Pensions Regulator, which would be responsible for overseeing the new policy, said the timing of its introduction is a matter for the government.

“As set out in our recent corporate plan, we are working with the DWP to develop an approach to regulating compliance around the automatic transfer of small pots,” a spokesperson added.

The DWP said it was working to develop a “safe” transfer system, that it had not set an implementation date and that it was aware that the industry needed time.