Will legislation stop pension fraud?

On 6 April, the government is implementing changes to the tax registration regime for pension schemes.

This measure extends HM Revenue and Customs' (HMRC) powers to refuse to register, and to de-register pension schemes to those which are master trusts and don’t have authorisation from the Pensions Regulator under their new authorisation and supervision regime, and to those pension schemes with a dormant company as a sponsoring employer.

It's one of a series of measures being discussed and brought in by the government to tighten the noose around fraudulent pension schemes and dubious transfers, and for Vince Smith-Hughes, retirement expert at Prudential, "it's good to see action being taken".

Government plans

On 12 February this year, the Department for Work and Pensions (DWP) and HM Treasury (HMT) jointly issued its response to the Work and Pensions Select Committee’s third report of session 2017-19. 

The 11-page document from the DWP and HMT in February welcomed the work of the Work and Pensions Select Committee's third report, and agreed with the WPC about the need to address the "threat posed by pension scams by cutting off scamming activity at the source in order to disrupt criminals and protect savers".

Perhaps one day it will be a storyline on a major soap opera. Martin Tilley

Therefore it outlined its next moves on the cold calling ban, which the industry had requested. 

The Financial Guidance and Claims Bill 2017, which is currently working its way through parliament, has included the ban on cold-calling, which currently is expected to be brought forward for a June 2018 implementation.

Originally, concerns were the ban would take two years to implement. The government acknowledged this timeline would be too long and that something needed to be done now. In its response, it said: "Although the introduction of clause four in the Bill in the House of Lords presents an opportunity to ban pensions cold calling, we agree with the committee's assessment that clause four as drafted is flawed.

This is for two main reasons: 

1) The government wishes to ban pensions cold calling more quickly than clause four allows.

2) Clause four does not provide details about the kind of issues that regulations laid to ban pensions cold calling would cover. In particular, there is no information provided on how any regulations laid would be enforced, or indeed whether they would be enforceable."

The government's response also welcomed the WPC's recommendation that the Financial Guidance and Claims Bill 2017 be amended to ensure people either tax or "expressly refuse guidance before they can access their pension savings."

Sadly, for Jane Goodland, responsible business director at Old Mutual Wealth, the government's response to the WPC's report was "light on details of their next steps".

However, she says: "Eyes will be [kept] peeled for what the new regulation will entail and the pressure is on them to get it right."

This is especially pertinent, since 97 per cent of all pension fraud cases brought to Citizens Advice since 2013 "stemmed from cold-calling", she adds.

John Lawson, head of financial research for Aviva, states: "Peers in the House of Lords passed the amendment to the Financial Guidance and Claims Bill introducing a ban.

"Financial education is really key here as the phasing out of defined benefit pensions and the introduction of pension freedoms means people now have choices to make."

Guidance

Also within the government's purview is how to increase the take-up of pensions guidance, which was brought in as a result of the pension freedom and choice regime in 2015.

The WPC's December report had raised this as a key point. 

It said while take-up of the Pension Wise service has grown, with 61,000 Pension Wise appointments in 2015 to 2016; 66,000 in 2016 to 2017 and 40,000 in the first half of 2017 to 2018, these figures were still vastly below the total number of people who might benefit from using the service.

The report said: "Pension Wise guidance is greatly valued by those who use it, but it is not reaching enough people. There are signs that take-up of guidance is increasing but this is from a very low base.

"While the Pension Wise website is a valuable resource, it is no substitute for a conversation with an expert. The existing promotion regime of signposting by pension providers - who have no business interest in promoting the service - and advertising has proved insufficient.

"Far too many people are currently taking vital decisions in the dark, putting them at greater risk of suffering irrevocable financial detriment through scams or choices contrary to their interests.

"As ever greater numbers of auto-enrolled savers approach retirements during which they will rely on defined contribution pots for retirement income, the need to boost engagement with pension guidance will grow increasingly acute."

Ms Goodland comments: "People should be getting help earlier in the decision-making process and that is something the government needs to work harder to promote. Knowledge is the main issue."

Knowledge is a key consideration for Jessica List, pension technical manager for Curtis Banks, who says: "Rules, such as a cold-calling ban, can only be fully effective if people are aware of them and can therefore spot for themselves when an offer appears to break the rules, and is therefore likely to be a scam.

"Information about new rules and preventative measures need to be circulated far and wide to reach the individuals who may be most vulnerable to scams."

The problems with giving Ssas

There seems to be a particular issue around small, self-administered schemes (Ssas) in particular, as Nigel Bennett, sales and marketing director for InvestAcc Pension Administration, states. 

"Ssas regulation needs to be reviewed to prevent these schemes from being established by scammers. A regulatory loophole was created in 2006 when the requirement to appoint an HM Revenue & Customs-recognised professional independent trustee was abolished.

"By reintroducing this requirement, with some modification, there could be a significant reduction in the prevalence of pension scams being used today."

Elaine Turtle, director of DP Pensions, comments that the government's consultation and responses were welcome but there is definitely more to be done. 

She highlights other measures mentioned in the consultation, such as redefining statutory transfers. Ms Turtle says: "While this is not wholly ideal, these are understandable, given suggestions that a significant number of one-man small, self-administered schemes are deemed to be of concern.

"This is unfortunate, but we do seem to be seeing some positive steps in the right direction with the new scheme registration process which, while taking a frustratingly long time, may be doing something to deal with rogue schemes at outset, and refusing registration." 

Regulators 

UK regulatory bodies have also been highlighting problems with pension scams and coming up with ways to combat these and take appropriate enforcement action.

In January this year, the Financial Conduct Authority (FCA) launched its "Scam or Smart" game, getting people to listen to three investment pitches to see if they are scams or genuine investment opportunities. The FCA's ScamSmart page also provides hints and tips for consumers to spot warning signs.

For the past few years, The Pensions Regulator (TPR) has been at the forefront of driving awareness and pushing for tougher action against pension scammers.

In February 2013, it launched its scorpion campaign to warn of the dangers of pension scams, which was refreshed and updated in 2016 in response to concerns raised since the start of the pension freedom and choice regime.

The campaign has been revamped to be clearer for savers, who were warned: "Don’t be next, predators are after your pension".

In February this year, TPR announced further measures to crack down on pensions scammers, including details of some joint enforcement action taken with the police.

Responding to this, Ben Fairhead, partner at City law firm Pinsent Masons, says: "It is good to see TPR continuing with a proactive approach in tackling perpetrators of pension scams.

"I do have a concern though about how schemes like this are apparently still being set up and presumably registered by HMRC despite the powers afforded to them in 2014 to prevent registration where there were concerns about the real purpose of a prospective pension scheme."

Mr Bennett says he would definitely like to see regulators take a more stringent line, with "tougher penalties for those involved with scams, both from the authorities and regulators, with individuals involved hunted proactively, taken out of business quickly and banned from holding any regulated position".

Fiona Tait, technical director for Intelligent Pensions, is also concerned that scammers are "continually developing new ways to approach and persuade people to use them", regardless of regulatory intervention.

She states: "The plan to remove individual advisers from the FCA register also looks to be a retrograde step, allowing fraudsters to potentially claim to be working for an authorised firm when they are not.

"Copycat sites - those which try to mimic government or real advice firms - should be prosecuted and given high-profile coverage in consumer publications."

She also advocates a change in legislation on the back of the 2016 High Court decision in Hughes v Royal London, as the first article in this guide outlines.

Ms Tait believes this will allow "providers and professionals who have concerns to challenge a proposed action without compromising the individual's statutory rights".

More ground to cover

Despite the cold-calling ban on the cusp of being enshrined in legislation, with a speedy implementation, Ms Goodland acknowledges: "A ban can only go so far. 

"It won't stop criminals from trying to rip off vulnerable people. What is also needed is an awareness campaign so people know if they receive a cold call concerning their pensions, then they need to go and speak to Pension Wise, a financial adviser or their pension provider."

Neil MacGillivray, head of technical support at James Hay, comments: "The authorities need to work quicker and smarter to get ahead of [the scammers], who always seem to be two or three steps ahead.

"When one door is being closed, another is already open and they've come quite a way through it."

Peter Bradshaw, national accounts director for Selectapension, agrees: "Will the problem get worse? I don't know. But the point is, scammers are usually one or two steps ahead of changes in legislation, so I do not think scamming will go away.

"All you can do, I suppose, is make people more aware of the fact that scams are out there."

Ben Fisher, consulting actuary for Xafinity Punter Southall, comments: "Awareness is the biggest area of improvement. There is a lot of information available, particularly from TPR." He says such information should be made available widely to individuals on various channels:

• Pension schemes' regular mailings.
• With a scheme's standard retirement and transfer communications.
• On a pension scheme's website.
• On the employer's intranet.
• Featured more in the popular press rather than specialist pensions press.
• Included on the forthcoming (2019) pensions dashboard.

Mr Lawson agrees with Mr Fisher that the dashboard "could also make a difference", explaining: "It should make people more aware of their pension savings and hopefully less likely to do something reckless with them."

Industry has a part to play

Mr Smith-Hughes lauds current legislation and work being done at government, regulatory and individual level to crack down on pension scammers, but thinks more needs to be done by the pensions industry, too. He says: "As a profession we cannot rely on legislation alone.

"Scammers have a knack of finding new ways to con people, causing them to lose their hard-earned savings, both in pensions and from elsewhere.

"There has been some good work by The Pensions Advisory Service (Tpas), the FCA, TPR and others in raising awareness, and all of us in the profession need to continue the momentum on this issue."

"As with any information about pensions", adds Mr Fisher, "it needs to be presented in an interesting and engaging manner to ensure individuals take notice of it, rather than just as plain text."

Ms Turtle comments: "We would like to see a re-education of certain parts of the pensions market to reinforce the message that just because they see sight of a small, self-administered scheme transfer request, it does not automatically mean there is a scam afoot, and the transfer should be stopped or artificial barriers put in place to delay them."

For Nigel Chambers, financial advisers have a key role to play in flagging up anything suspicious. The co-founder of CTC Software explains: "Where regulated advisers are involved, they should question the presence of any unregulated introducer at any point in the chain.

"Even where a regulated adviser is involved, any stage which is deemed 'execution only' raises questions. The sheer number of non-advised drawdown cases is worrying, but in many ways is a direct consequence of the retail distribution review as many consumers are unwilling to pay even reasonable levels of financial advisory charges."

Added to this, according to Mr Chambers, is the fact that since the RDR, there are "just not enough financial advisers with the necessary qualifications to provide the amount of advice really needed". 

For this reason, he believes the whole industry, including the media, has a role to play in increasing awareness.

It seems this also comes down to education. Martin Tilley, director of technical services for Dentons Pension Management, opines: "What is needed is a nationwide educational programme of awareness to inform the population that pensions in particular are usually one of the largest pots of wealth they will hold.

"As a result, there are scammers who, rather than work for their own money, would rather con them out of theirs. Perhaps one day it will be a storyline on a major soap opera."

Mr Bennett fully agrees with Mr Tilley on this latter point: "A well-written story in EastEnders, Coronation Street or Hollyoaks, with a character falling for a scam, would get the message to a much bigger audience than would normally be possible."

simoney.kyriakou@ft.com