Liberation scams are a growing tumour on the pensions industry, offering scheme members access to their money early at the cost of large swaths of their pension pot, or possibly the lot.
The organisations behind these schemes are known to move quickly, responding to closing loopholes and changing approaches to stay ahead of Project Bloom, the multi-agency attempt to stop them.
This fast-moving environment will soon be transformed by the most significant reforms to the UK pensions industry since 1921. What effect will these changes have on pension liberators? And how can schemes protect their members who, understandably, may find it hard to differentiate pensions freedom from liberation?
Comment: Beating the pension liberators
In the 90s, jet skis became more common on our shores and led to a spate of serious accidents. At the time, there was a call for regulation over who could use such vehicles and how they could use them.
I remember speaking to a marine organisation who did not think regulation was the answer as it would be impossible to enforce, but suggested that a collaborative approach with the industry raising awareness of the dangers.
I am not an expert on marine regulations but it does strike me that there may be some similarities with pension scams.
Pension scams have always existed, but I have been shocked since being at The Pensions Advisory Service at how widespread they have become, in terms of the people that are targeted, the schemes they are in and the size of their pots.
From April 2015, the scams are likely to expand into people being actively encouraged to cash in their pension fund so that it can be invested in an ‘exciting’ but often inappropriate, high-risk and sometimes fraudulent investment.
The work that has been done to add protection for the transfer from scheme to scheme will act as no safety net in these circumstances.
The stories we hear on our helpline range from scary to bizarre. The scams are a hard sell and people are frightened to say no.
There was a lady who called us while the salesman, who had promised an “8 per cent guaranteed investment return”, was still in the front room and who, after she asked him to leave, called our helpline accusing us of everything under the sun.
Bizarre stories include investment vehicles that range from the well-reported property in Cape Verde through to truffles. The scams change on a regular basis but the level of hard sell remains constant.
We believe the only way to prevent pension scams is to help people protect themselves. TPAS and the Association of British Insurers produced an infographic, available on our website, that identifies how the scammers approach people and the questions to ask to check whether it is a scam.
As an industry, we all have opportunities to raise awareness about pension scams. Let us all do it together. Pensions are a valuable asset and we need to help people protect them.
Michelle Cracknell is chief executive of the Pensions Advisory Service
Holders of defined contribution pension pots will – from April this year – have a wider range of options over what to do with their pot when they reach age 55, including taking the entire pot as a cash lump sum and increased opportunity to draw down their investment.
There has been some concern liberation schemes will increase when people have more access to their retirement savings, but others believe it could reduce the amount of attempted liberation scams, as retirees will have access to more of their pot as cash.
Ben Fairhead, senior associate at law firm Pinsent Masons, says: “It may result in a slight reduction in pensions liberation, because people approaching 55 will have the greater flexibility coming up when they reach that age.”
However, this also presents problems, Fairhead adds, as fraudsters may begin targeting people approaching 55 or older to withdraw their pension as cash and invest it in a fraudulent scheme or fund.
He says: “The problem is, once you’ve hit 55 and you have that flexibility it’s probably more difficult to exercise any sort of control over what individuals do with their pension.”
The pensions ombudsman has so far released three determinations relating to schemes blocking transfers to what they suspected were fraudulent schemes.
The determinations were released at the beginning of this year following repeated delays from the originally planned publication date of the start of 2014. These determinations are the first of around 80 cases that should indicate how trustees are supposed to deal with suspected liberation activity.
However, the decision to block in each case was upheld, either because the receiving schemes failed to meet regulatory standards or the member had no statutory right.
These protections do not apply where members are withdrawing money as cash, and industry experts familiar with the matter believe the ombudsman is already examining cases where the suspect schemes meet the correct regulatory requirements.
Margaret Snowdon, chair of the Pensions Liberation Industry Group and director at consultancy JLT Employee Benefits, says: “People will have access to cash. What they have at the moment is the right to transfer. There’s a process of due diligence which surrounds transfers which gives some safety.”
She adds the industry group is working on a code of good practice for combating pension scams.
“At the moment, we’re drafting a code of practice for due diligence on transfers. I think that’s where the dangers will come.”
Matthew Swynnerton, partner at law firm DLA Piper, says: “The way trustees are able to block those sorts of scams is if the receiving scheme doesn’t meet some of the requirements… it’s unlikely the trustee would know what the member would do with the cash and they may be criticised if they tried to take action about it.”
Another possibility is that fraudsters would increase their focus on younger sections of the market, according to Sean Browes, trustees representative at independent trustee company Dalriada.
“Liberation per se was more targeted at the sub-55s anyway… If you’re in your 30s, 40s and about to go under you’re not going to care so much if it’s slightly dodgy.”
He adds the message for members post-April would be to avoid investment scams, which is slightly easier to promote than warning about pensions liberation.
Swynnerton says the heart of schemes’ existing strategies should continue once the reforms have taken effect: “The due diligence that trustees should take should apply in the more flexible world post-April.
“Trustees should be diligent now and I don’t think that should change. We know liberation and scams are happening at the moment, we’ll have to see how much the level of fraudulent activity is affected by the flexibility.”
The reforms can be described as “legalised liberation” and trustees should focus on educating members about their choices to ensure they are aware of the risks, says Snowdon.
“Education is the best they can do because they have no right to tell them what to do with their scheme,” she said. “A lot of schemes I’m sure will take up commercial guidance looking to educate people throughout their careers.”
Browes says the introduction of the guidance guarantee would help protect members, but warns more action may be needed.
He adds: “I think there has to be generally a campaign to better educate people as to what their options are and what to look out for.”
But experts agree better understanding will be needed to counter investment scams in the more flexible pensions environment, to avoid savers mistaking liberation activity for the new rules.
