PensionsSep 26 2017

Why it's still open season for pension scammers

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Why it's still open season for pension scammers

The government has begun to take action on pension scammers, but an uncertain timeline has left the industry asking what more can be done. Simoney Kyriakou reports

Pension scams and their originators can be as tricky to pin down as the actual roots of the word scam itself. The word entered the lexicon in the 1960s, but beyond that its origins are unknown.

Victims of scams end up feeling lost themselves – too often when a fraud has been identified, it is too late to save their cash. According to figures from the City of London Police, £42m had been lost from pension pots to scams within just two years of the 2014 Budget, when then chancellor George Osborne announced the pensions freedom and choice regime.

This August, the Serious Fraud Office warned of yet another investment scam involving storage units, which has taken £120m out of people’s savings, including their pensions. But those who operate elaborate schemes that are designed to defraud people of their pension pots may find it tougher to do so now the UK government is bringing in new laws. 

Tough measures

This summer, the government announced a ban on cold-calling, giving powers to HM Revenue & Customs (HMRC) to prevent potentially fraudulent pension schemes from being opened and taking action to prevent transfers from genuine occupational schemes to fake schemes.

As mentioned in the consultation response, there are areas where there is a weak link in the legislation, for example the current statutory right to transfer. Jon Greer

Under the new rules, which are set to be finalised this year, the government wants to ensure only active companies that produce regular up-to-date accounts can register pension schemes. According to government statistics, an estimated 250 million cold calls each year offer the public free pensions reviews or incentives to release pension funds early.

Therefore, incorporating texts and emails into the cold-calling ban, and imposing hefty fines of up to £500,000 for those that flout the rules, will go some way towards cracking down on scams. 

But the point at which these rules will be reinforced is still uncertain. In the meantime, people are still falling victim to cold-calling, texting and those oh-so-promising and professional looking websites.

Helen Morrissey, personal finance specialist at Royal London, explains: “Government figures show almost £5m was taken by pension scammers in the first five months of 2017 alone and, given the under-reporting of scam activity, this is likely to only be a small proportion of the true amount of money taken. 

“The ban needs to happen as a matter of urgency alongside an awareness campaign to let people know that firms should not be contacting them in this way.”

Open season 

There have always been fraudsters and thieves, but pensions freedoms, which came into force in April 2015, have made it easier for scammers to prey on the unwary.

Philip Brown, head of policy at LV, comments: “The pension freedoms are fundamentally beneficial for people, giving them welcome control and flexibility over their retirement savings. However, these reforms have also increased the risk of retirees being targeted by scammers.”

Timing

As welcome as the ban is, the timeline looks too lengthy for some. At the beginning of September, industry experts welcomed indications that the ban might be included within the Finance Bill, but these proved misplaced. And an enquiry by the Work and Pensions Committee, announced on 20 September, will take time to unfold. 

Although HMRC told sister title FTAdviser it “took the issue of pension scams very seriously, and further legislation to ban cold calling will be brought forward in due course”, many believe that this implicit delay is unwarranted.

“My concern is the glacial change we are seeing to combat this. The longer it is easier for scammers to operate, the greater irreparable damage it has – both on those directly affected and indirectly on the pensions industry as a consequence of reduced confidence in the system,” says Jon Greer, head of retirement policy at Old Mutual Wealth.

Other concerns

It is not just the timing bothering some commentators. Robin Ellison, head of strategic development for City law firm Pinsent Masons says: “It’s not the timeline that is concerning as much as the lack of real intervention”.

Mr Ellison explains that the “pure fraud” involved in these scams, by which the operators steal the money through investing it in worthless assets, will not be stopped by measures announced by the government this summer.

He says: “Cold-calling will hardly stop these guys; and few individuals will go onto The Pensions Regulator’s or FCA’s websites and follow the complicated guidance. They will probably only do so after they been scammed.”

Nor does Mr Ellison think the greater emphasis on preventing scams through high-profile advertising and coverage will make individuals any more savvy.

He adds: “There is no independent research on whether people are more sceptical. Some no doubt will be, but there are still many naïve people around.”

Mr Greer agrees: “Scamming has not waned; the fraudsters have just changed tack from facilitating early access to pension funds – for a huge fee – to outright theft by scamming people into investing into fictitious investments.”

More measures

Then there is the issue of better – not necessarily more – regulation around pension transfers, especially from gold-plated defined benefit schemes to offshore or unregulated schemes.

“Due diligence is fairly robust [but] as mentioned in the consultation response, there are weak links in the legislation, for example the current statutory right to transfer,” says Mr Greer.

Stuart Price, partner and actuary at pension adviser Quantum Advisory, adds: “There is still much more the government needs to do. A government review into the restrictions on pension transfers needs to be carried out and it needs to be made easier to block a transfer if it is suspected that a fraudulent scheme is involved.”

He also believes the government could do more within its existing powers to “cut the fraudsters off before they’ve begun by making it more difficult to establish fraudulent pension schemes”.

What more can be done?

What is the answer? For Mr Ellison, there are “two immediate solutions”. The first is to effect a change in the law and to give “a free pass” to pension schemes and insurers refusing to accede to a request where they have suspicion that the receiving scheme is not a bona fide one.

Mr Ellison also advocates old-fashioned police work, and adds: “Arrest, charge and maybe convict scammers.” Meanwhile, advisers are left on the front line, as Mr Ellison notes. Many will fall prey to scammers because they have not sought independent advice and only turn to an adviser when it is too late. Others will badger advisers to let them have their money so they can invest in a tempting Costa Rican teak plantation offering a 25 per cent return.

Practically, advisers can: 

  • Improve their own awareness of potential scams.
  • Inform clients and prospective clients of such scams.
  • Help raise awareness of the FCA’s ScamSmart and the Pensions Regulator’s Scorpion campaigns.
  • Familiarise themselves with the industry code of practice to help spot scams.
  • Ensure their professional indemnity cover is as comprehensive as possible.
  • Help raise awareness, and help the government and regulator to do so.

“As an industry”, Mr Brown comments, “we have a duty to consumers to help educate and protect them from these types of scams. Taking professional financial advice is one way consumers can protect themselves but as it stands, it is no-one’s responsibility to actively raise the benefits of advice.

“The government and regulator must promote the benefits of advice so people understand its value, and the new single financial guidance body should play a key role here.”

It is evident there is still a long way to go when it comes to stopping potential scams. As it stands the measures proposed by the government will not be enough to prevent more pots falling prey to the pension pirates.

simoney.kyriakou@ft.com