How prevalent are pensions scams?

Figures from Aviva in 2017 also highlighted how many phone calls are being made each day to people: some 2.2bn nuisance calls and texts were made in 2017. 

This equates to approximately 6m nuisance calls and texts a day - or 4,200 calls and texts made every minute. In fact, by the time you've read this article, more than 30,000 such calls and texts will have been plaguing UK consumers.

Many of these will be relating to payment protection insurance (PPI) or spurious 'we're calling about your accident' script-based calls, but there is a growing number of pension scams that are getting through to people.

The level of pension scams is probably being under-reported by victims. John Lawson

But is the problem really as big as the consumer media points out when it comes to pensions specifically?

"Yes", says Ben Fisher, consulting actuary for Xafinity Punter Southhall, "and the methods are changing daily".

He explains: "Scammers are finding new ways to contact and convince vulnerable members to put their life savings at risk. We are actually concerned that the media is understating the prevalence of fraud."

The City of London Police last year reported how prevalent pension fraud is - and the sorts of sums involved - and these are just the reported cases, or those which have already been brought to light.

According to the police, £42m has gone missing from people's pension pots since the pension freedom and choice regime was first announced in the 2014 Budget.

Last 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. 

For John Lawson, head of financial research from Aviva, the true scale of the problem is unknown. He says: "The level of pension scams is probably being under-reported by victims."

Jessica List, pensions technical manager for Curtis Banks, is also of this opinion. "The problem is that it's almost impossible to obtain complete, reliable data which shows the whole picture.

"For example, pension providers may be able to track changes in the numbers of attempted transfers to fraudulent schemes, but cannot know how many people use the pension freedoms to withdraw money that will fund scam investments, despite the warnings."

Additionally, she says so many scams go unreported, so it is "difficult to know how widespread the problem is".

Changing face of fraud

Mr Lawson comments the way in which pension fraudsters operate has changed since the implementation of the pension freedom and choice regime, which came into force in April 2015.

He says: "Before 2015, many pension scams involved liberation of some kind - consumers would be offered the chance to access their pension funds early by rogue firms. This would then be treated as an unauthorised payment and subject to large tax and financial penalties for the consumer and provider."

Providers could carry out investigations into such liberation requests and were able to attempt to block any transfer if the receiving scheme did not appear to be legitimate.

"Now, anyone over 55 is free to take their money as they wish, subject to tax, so it is much harder for providers to monitor potential scams," he adds. "It means it is much harder to measure the number of scams taking place, because many people are not aware they have been ripped off."

Martin Tilley, director of technical services for Dentons Pension Management, says many scammers use the Self-invested personal pension (Sipp) market, starting with a call or text offering a free pension review. 

New ones appear in different guises all the time. Nigel Bennett

By citing a period of poor performance in the past 12 months, the scammers are opening the door to suggest some alternative offering with "guaranteed returns".

Most Sipp providers and Ssas trustees are wary to these investments, he says, but there are still scammers who target people aged 55 and over who can withdraw their whole pension pots.

"Fuelled partly by mistrust of the government's constantly changing rules surrounding pensions, and the threat of the withdrawal of the tax-free lump sum, some people will need little convincing to get their pension money into their own hands," Mr Tilley says.

And the list of potential scams can be as long as your arm, and "new ones appear in different guises all the time", warns Nigel Bennett, sales and marketing director for InvestAcc Pension Administration Limited. He highlights a few of the more bonkers ones: 

• Off-plan overseas hotel rooms.
• Fractional land banking.
• Parking spaces at football grounds/airports.
• Syndicated property investments with a guaranteed return/buy back.
• Mini-bonds, which are "opaque and containing unsuitable assets".
• Forex/CFD/Binary options, which are unlikely to be suitable for a typical investor.
• Complicated arrangements involving investments and loans, where the client claims tax relief on a multiple of the amount they invest.
• Sustainable energy.
• Overseas forestry.
• Carbon credits.
• Storage pods.

Burial plots are "a recent favourite" for Dentons. Mr Tilley elaborates: "A caller last year asked us to set up a Ssas to invest in burial plots. The scammers start with material facts to build confidence. In this case, the suggestions Muslims cannot be cremated and therefore must be buried.

"Therefore, if you are investing in an area with a high concentration of Muslims, it will mean demand will increase as the supply of land is finite. 

"The statements are reasonable and believable but the investment revolves around pyramid selling and the scammer taking a cut at every sale."

Does the government know?

The government has recognised the seriousness of the matter. 

In 2017, HM Revenue & Customs published its response to a cold-calling consultation, in which it reported the sheer scale of the potential pension scamming problem. 

The 28-page document, Pension scams: consultation response, cited the following:  

• Research by the Money Advice Service suggests there could be as many as eight scam calls every second – the equivalent of 250m calls per year.
• Citizens Advice calculated 10.9m consumers have received unsolicited contact about their pension since April 2015.
• There were 30,000 ‘Defined Contribution’ scheme transfers in 2015/16, representing £1bn of assets.
• Industry estimates suggest that fraudsters could be behind as many as one in 10 pension transfer requests.
• Individuals reported nearly £19m in suspected pension liberation fraud between April 2015 and March 2016 – twice as much as for the same period in 2014-15.

According to Fiona Tait, evidence given to the Work and Pensions Committee in November, which formed the basis of its December report, Protecting pensions against scams: priorities for the Financial Guidance and Claims Bill, the number of pension scams is increasing, "not just in numbers but also in the sophistication and complexity of the scams being carried out".

Transfer scams

Mark Smith, chief operating officer for Mattioli Woods, says while the regulators and legislation has put in place certain barriers to prevent the mass transfer of pension pots - particularly the gold-plated defined benefit pensions - into inappropriate or fraudulent schemes, many dodgy dealers are trying to find ways around the legislation.

For example, Mr Smith says the increasing focus on capital adequacy among Sipp providers who hold non-standard assets has forced a shift to investments being made with Ssas instead, which TPR warned about in 2017.

Investors are being encouraged to transfer to either a Sipp or Ssas structure where the scheme administrator allows those non-standard investments (ie overseas property developments) to be made. 

The lines can be slightly blurred when it comes to fraud versus bad investments, as the authorities can struggle to evidence any illegal activity. Neil MacGillivray

One way he says advisers and consumers could spot a potential scam is where inducements are offered to an introducer or the member themselves. "This is effectively a 'cash back' incentive to the member as a result of the pension investment being made, something that itself would lead to an unauthorised payment tax charge from HMRC.

"While regulated transfer advice cannot be given, the introducer can assist with the administration of the transfer for an additional fee. 

"Once the investment has been placed, the non-regulated introducer receives a commission which can be anywhere up to 30 per cent to 40 per cent of the value of the investment."

Although there is a requirement under law - enshrined in the Pensions Act 2015 - that any transfer of a defined benefit (DB) pension worth £30,000 or above must be under advice from a qualified financial adviser, this is not always a protection.

In fact, as the below case study indicates, some fraudsters are pretending to use the name of authorised IFAs to get past any safeguards being implemented by providers. As Mr Fisher comments, the £30,000 rule "is not always the protection it appears".

Case Study: How Xafinity Punter Southall spotted a pension transfer scam

Aviva's Mr Lawson cites a High Court ruling from 2016. This concerned a 2014 attempt by Royal London to block a transfer request from a consumer because the life and pension provider was concerned the newly-formed small, self-administered scheme (Ssas) was to enable her to invest with a Gibraltar-based company which was marketing, among others, property investments in Cape Verde. 

The Pensions Ombudsman had originally upheld Royal London's reasons for blocking the transfer, but the High Court overturned this. You can read the full case particulars here. 

Given all of the above, it would be tempting to assume that every prospective caller is a dodgy one. Intelligent Pensions' Ms Tait says: "Not all unsolicited calls are necessarily scams.

"However, it is a large number and if even a small percentage are fraudulent it would be too much. 

"Anything the media can do to highlight the problem at this stage is a good thing, as long as it avoids scaremongering and includes guidance on how to spot a likely scam, and where to find more information."

And then there is the fact that every investment is a scam - as Neil MacGillivray, head of technical support at James Hay, comments: "The lines can be slightly blurred when it comes to fraud versus bad investments, as the authorities can struggle to evidence any illegal activity.

"Of course it can be completely immoral, but not illegal."

When it comes to immoral, Nigel Chambers, co-founder of CTC Software, says advisers also need to be aware of standard investments. "Scams form one end of the spectrum but I am also concerned at some of the very high level of charges that can be seen even where standard investments are involved.

"Investment strategies for the vast majority of people can be met with investments carrying increasingly lower charges.

"When the charges of a Sipp provider, a platform, the discretionary manager, the underlying funds and the adviser fees are all added together, the level of charges is often unsupportable."

So it seems advisers need to be wary not just about potentially illegal investments, but also those which might be inappropriate or simply far too expensive at the end of the day.

simoney.kyriakou@ft.com