Government and regulators have been urged to strengthen the powers of trustee boards in opposing suspicious transfer requests, as an alert from the Financial Conduct Authority warned that some advisers are not carrying out proper due diligence on receiving scheme investments.
Pension scams, which range from liberation fraud to unapproved and often overly risky investment strategies, have come under increased scrutiny from government and regulatory bodies, including a consultation on banning cold calling.
But trustee powers to block suspicious transfers are still limited, despite record numbers of transfer requests due to low interest rates.
You need to get advice, but you don’t need to follow that advice
Rosalind Connor, ARC Pensions Law
In its supervisory work, the FCA found that a small number of firms had concentrated on generic critical yield analysis to recommend or advise against a transfer, without considering whether the investments of the receiving scheme would introduce greater risk of losing those benefits.
The regulatory body declined to comment on whether it would make trustees aware of which advisers had not met due diligence standards, or take any action to improve standards among its authorised advisers.
Critical yield methodology not sufficient
The consensus among the advisory community is that transfer recommendations must be based on a holistic view of a client’s financial and personal situation.
“On transfer, you are essentially giving up a guaranteed benefit for one that holds multiple risks,” said Toby Bentley, consultant at Amicus Wealth. “It is well documented that recommendations of this nature cannot be based on critical yield calculations or investment assumptions alone.”
However, the presence of FCA-authorised firms not following this example may be of concern to trustees, who are often obliged to pay transfers if a member has taken advice and is transferring to a scheme that meets legal requirements.
“It does worry us as trustees,” said Mike Crowe, trustee representative at Dalriada Trustees. “We like to look at advisers as a line of defence that members should be relying on.”
More powers for trustees?
Crowe added that while trustees should not be expected to examine individual members’ financial situations, they should carry out their own due diligence on a receiving scheme.
The Pension Liberation Industry Group published a detailed code of good practice on combating scams in 2015.
Crowe said that insistent members should retain their freedom and choice, but argued for legislative support for trustee boards seeking to protect members from scams.
“Anything that can strengthen our powers in order that we can help members is helpful,” he said.
Others went further, with Rosalind Connor, partner at law firm Arc Pensions Law, suggesting that the statutory right to transfer should be reconsidered.
“If you’re coming out of a defined benefit scheme into a defined contribution one you need to get advice, but you don’t need to follow that advice,” she said. “The fundamental problem here is that there is a law that says you have a right to transfer.”
The government has begun to look at limiting the statutory right in its consultation on scams, launched in December last year. Connor also said she sympathised with advisers, who are faced with a more complex due diligence process than ever before.
Indeed, in a separate note the FCA described the increasing complexity of third-generation pension scams, which “use the services of a discretionary fund manager to create an investment portfolio that does not require the direct input of the investor”.
The portfolio is then invested in bonds issued by a special purpose vehicle, which in turn acquires unregulated physical assets.
Keep pension freedoms
For their part, advisers said they did not think that the right to transfer should be altered, preferring more robust and clear regulation of investments.
Cold-calling ban could strengthen scheme powers to block transfers
The government has launched its consultation on pension scams, proposing bans on pension-related cold calls, limits on the statutory right to transfer and tighter regulations for setting up potentially fraudulent schemes.
“What I’d really like to know is, ‘This is what you can invest in and this is what you can’t invest in',” said Ian Price, divisional director of pensions and consultancy at St. James’s Place Wealth Management.
And Alex Waite, partner at consultancy LCP, said he favoured a relaxation of trustee requirements, which currently ask them to consider a member’s financial wellbeing after they have left a scheme.
“To my mind that’s the end of a trustee’s responsibility,” he said. “I’m perhaps more prepared to allow people to make wrong decisions.”
Despite being frustrated at the way transfer requests are advised, he encouraged schemes to continue offering regularly updated transfer values as a way of gradually derisking.
