A recent increase in reports of suspected pension scams has been called “the tip of the iceberg”, as some experts said tighter legislation would help schemes ensure their members do not lose hard-earned retirement savings.
The BBC's recent Panorama programme and campaigns such as Scams Awareness Month by Citizens Advice and Trading Standards, are exposing the risks savers face at retirement, but as the industry increases its efforts, so do scammers.
The Pensions Ombudsman received more than 200 complaints relating to pensions liberation last year, making it the most common issue referred to the service. In 2014-15 180 complaints were made.
In its annual report the ombudsman made it clear that its use of the phrase “pensions liberation” was to avoid the negative judgement implied by “scams”.
Experts said that fraudsters’ methods have developed in recent years, offering seemingly high-return, long-term investments in offshore locations. These investments may simply be unsuitable for savers, or divert funds to fraudsters.
Meanwhile, consultancy Xafinity also reported that it had identified potential scam activity in 11 per cent of its pension transfer requests.
When you see the impact on peoples' lives I think this is one area where greater regulation is required
Neil Copeland, Dalriada
Nick Moser, head of restructuring and corporate recovery at law firm Taylor Wessing, said the statistical increase did not necessarily mean scams are occurring more often, but that they nonetheless represent a significant problem for the pensions industry.
“It’s a substantial problem already, which hasn’t been fully uncovered, so that what you’re looking at at the moment is the tip of the iceberg,” he said.
Unauthorised payments out of pension schemes are subject to heavy tax penalties, which in pension liberation cases could result in the victim of the fraud being taxed up to 70 per cent of their pot, according to the Pensions Advisory Service.
Moser said victims' reluctance to pay this tax bill could dissuade them from whistleblowing on fraudulent schemes, and this might explain why it is so difficult to identify the true scale of pensions-related scams.
He added that the long-term nature of investments offered by scammers means victims do not expect to see returns in the short term.
“So you may be blissfully unaware that your money has gone nowhere near the investment that you thought it was going to because there’s nothing triggering you to investigate,” he said.
Tackling the fraudsters
The Pensions Regulator, which leads the interdepartmental Project Bloom (set up to prevent and disrupt scams), has said it knows of around half a billion pounds of fraudulent pensions activity, but anticipates the true figure may be much higher.
A spokesperson said: “Our main focus is to help prevent people from falling for a scam in the first place; once money has gone into any kind of scam it is very unlikely that either we or anyone else will be able to recover it because, in many cases, it will have disappeared overseas.”
Instead, anti-fraud efforts to date have focused on improving trustees’ due diligence processes and preventing the creation of fraudulent schemes.
As the first line of defence against suspicious schemes, HM Revenue & Customs was given stricter powers to regulate qualifying recognised overseas pension schemes, a model often used by scammers.
Ben Fairhead, partner at Pinsent Masons, said the update to HMRC’s powers has “massively reduced” the number of fraudulent new schemes, but that there is still work to be done.
“At the end of the day, if the schemes don’t get registered in the first place then you don’t have the ability for anybody to transfer any money into the scheme,” he said.
Fairhead said widespread uptake of the Pensions Liberation Industry Group’s Code of Good Practice, to which he contributed, shows that trustees and providers are making their own concerted effort to tackle scammers.
The code encourages trustees to make members aware of the regulator’s Scorpion information campaign upon receipt of a suspicious transfer request, among other measures.
Trustees powerless to stop transfers
But information campaigns can only go so far, according to Neil Copeland, independent trustee at Dalriada. In January the High Court upheld Donna-Marie Hughes’ appeal against Royal London’s attempt to block her transfer to a small self-administered occupational pension scheme.
The Pensions Ombudsman had previously sided with Royal London on the basis that Ms Hughes had no earnings from the scheme’s sponsor, but was overturned by the court.
“It becomes very difficult for trustees not to pay a transfer value where they have exhausted the process they can go through, because the courts have established this statutory right [to transfer],” said Copeland.
He emphasised the need for legislative change, adding: “When you see the impact on people’s lives I think this is one area where greater regulation is required.”
