Personal PensionMay 15 2014

More than 6,000 pension schemes suspect liberation fraud

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Around 14 per cent of pension schemes have suspected pension liberation fraud in member transfer requests, according to a study conducted by the Pensions Regulator, meaning more than 6,000 schemes are likely to have seen evidence of the activity.

Liberation fraud was a new subject included in the latest iteration of the regulator’s annual scheme governance survey, with the results highlighting just how prevalent the issue has become.

Based on November 2013 data from the Pension Policy Institute which puts the number of schemes in the UK at 44,440, the 14 per cent of 449 participants responding to the survey would equate to more than 6,200 schemes that have suspected ‘liberation’ behind a transfer request.

The term ‘pension liberation’ is the name for the process by which people release their pension funds before retirement and convert their pension benefits partly or entirely into cash.

This usually involves the transfer of pension benefits away from the scheme that currently holds it to a new scheme that makes the transfer value available as a cash payment back to the member, either directly or indirectly via loans which the member is notionally required to repay.

These deductions can typically result in only 70 per cent to 80 per cent of the original value being available. In addition individuals run the risk of HM Revenue & Customs imposing tax charges of up to 55 per cent, which can rise to as much as 70 per cent with penalties.

HMRC was handed a suite of new powers at the Budget in March that will allow it to refuse to register a pension scheme if it believes it will be used as a liberation vehicle.

While the survey found 94 per cent of respondents say they were aware of pension liberation fraud before participating in the survey, more than one in five schemes admitted it does not have processes in place to identify the activity.

Most medium (75 per cent) and large (83 per cent) schemes have already discussed the subject at trustee meetings and are already including the regulator’s transfer pack insert when responding to members’ transfer requests.

Around three in four schemes are ‘very confident’ that their scheme administrator or manager will have the ability to make a decision about whether or not to process a transfer that is considered to be suspicious, but only just above half are as confident in their trustee board making this decision.

‘Pension liberation’ is the name for the process by which people release pension funds before retirement and convert benefits into cash by transferring funds to a new scheme that either provides a direct payment or offers loans which the member is notionally required to repay.

FTAdviser has previously reported that a number of pension and self-invested pension firms have confirmed they are refusing to carry out pension liberation transfers or seeking to delay any transfers as debates rage over the requirements under law for providers to process requests.

Friends Life revealed last year it has declined over 500 requests to transfer clients’ pensions to pension liberation schemes, with the total transfer value of these requests being over £12m. Aviva has stopped 250 people transferring their pensions with a total value that “amounts to millions”

In February, the Pensions Ombudsman revealed he is currently dealing with around 45 complaints regarding pension liberation, with the majority of complaints concerning providers who did not allow a transfer to a pension liberation scheme.

At the time, the ombudsman had just under 40 complaints from people whose pension provider disallowed a transfer because the provider believes that its purpose is pension liberation.

A handful of complaints are from people who did transfer but into arrangements that were subsequently effectively frozen due to regulatory action.

These decisions are due imminently, however Neil MacGillivray, chairman of the Association of Member-Directed Pension Schemes, warned the decisions could “open the floodgates” for complaints over providers delaying transfers due to pension liberation suspicions.

For more information on pension liberation and to earn 60 CPD minutes, read FTAdviser’s Guide to Pension Transfers.