PASA's Margaret Snowdon explores the difficulties facing trustees when it comes to protecting scheme members, and what changes are needed if the industry is to minimise the cost of scams.
Action points
Check if a scheme is registered. Take care that the name is exactly the same as the registered arrangement – a letter wrong could have dreadful consequences.
As a minimum, ensure you send the Pensions Regulator's 'Scorpion' campaign material direct to a member’s home address, not via an intermediary. Even better, also talk to members whose transfers look a bit suspect, so that you know they understand some of the issues. Encourage them to talk to the Pensions Advisory Service.
Pay the transfer with a very strong warning that it is being made because of a legal right and that any subsequent losses are the responsibility of the member. A strong discharge form will help here.
Pension scams are the scourge of the industry right now. With the advent of pension freedom, where members have greater choice and the ability to take cash out of schemes and invest it directly themselves, millions of pounds are being lost to scams.
We really have no idea how much has been lost because the vast majority of damage is not even suspected yet – people do not engage and so will only find out when they try to claim their retirement incomes later on.
I would not be surprised to find the cost at £1bn, but whatever the figure, it represents a lot of pain and anguish.
The outcome of the Hughes judgment is that many trustees now consider trying to stop transfers a waste of time – and this is a backward step
We have a perfect storm of conditions that allow scammers to flourish:
A low level of understanding of pension matters by the general public.
A lack of public trust in pension professionals (encouraged by scammers).
Low levels of return on savings.
Scammers who see opportunity and are unafraid to pursue it.
Legislation that hobbles trustees' ability to apply common sense.
Between a rock and a hard place
We all say that if a deal is too good to be true, then it probably is – but no one can say for sure that a particular offer is a bad one, in case they are wrong and get sued.
We can only provide generic statements and hope that members pick up on them. Well, they don’t always. They instead suspect our motives as preventing them doing what they believe will be best.
Trustees are between a rock and a hard place on scams. If they stop or delay a transfer, no matter how well intentioned, they could be on the wrong side of the law.
If they allow a transfer to proceed, they could face a complaint that they should have stopped the member doing what he wanted, or they could be found to have transferred to an unauthorised scheme and required to pay tax charges (or even to reinstate the member’s lost benefits).
The Code of Good Practice published by the industry in 2015, through the Pension Liberation Industry Group started by the Pensions Administration Standards Association, helped trustees to follow consistent due diligence to help them judge whether or not a receiving scheme was likely to be a sham.
The pensions ombudsman supported this due diligence approach, which was extremely helpful to trustee boards. He even made determinations that gave succour to trustees and providers in their endeavours and courage to do what they felt was right.
Hughes v Royal London setback
However, we all underestimated the strength of the law in this area. The recent High Court ruling in the case of Hughes v Royal London turned the pensions world on its head by focusing on the primacy of the member’s right to transfer.
It found that while a scheme member needs to receive remuneration from an employer, the source of those earnings is not relevant. This tore down a helpful legal barrier that made scammers work a bit harder to get their hands on members’ money.
The outcome of the Hughes judgment is that many trustees now consider trying to stop transfers a waste of time – and this is a backward step.
The focus of scammers today is on transfers to unsuitable investment vehicles, often overseas.
There is fallout now from the HM Revenue & Customs list of qualifying recognised overseas pension scheme, which turned out not to be an indicator of the robustness of overseas schemes, and the list of recognised overseas pension schemes is now very small and self-certifying. Many transfers have been made to overseas arrangements previously on the list.
Trustees are damned if they do and damned if they don’t. For this reason, the PLIG has recently reviewed the code, and considered how the due diligence process can be simplified and strengthened in light of regulatory change, the evolution of scams and the direction of the courts.
It has produced its initial findings, with some fairly radical options, and for the first time, we will be calling for legislative change to help trustees and members avoid the enormous financial, social and personal cost of scams. Watch this space.
Margaret Snowdon is chair of the Pensions Administration Standards Association
