The government’s consultation on pensions fraud is a positive step but more could be done, says Royal London’s Fiona Tait.
Key points
Setting up new pension schemes is too easy
The proposals will not stop fraudsters but there will be more power where fraud is suspected
It will be easier to identify wrongdoing and prosecute perpetrators
Unfortunately it will not stop fraudsters entirely, as they are very clever at evolving when faced with new barriers. There are additional actions that could be taken.
Broadly, the proposals are to be welcomed and should be enacted. Each of them blocks a different and key component of the typical pension scam process.
Making it harder to register a new pension scheme
The process usually starts with the establishment of a dormant or shell company, which acts as the sponsoring employer for a new pension scheme, usually a small self-administered scheme.
At the moment it is far too easy to set up a registered pension scheme because it is really too easy to set up a UK-registered company
At the moment it is far too easy to set up a registered pension scheme because it is really too easy to set up a UK-registered company: you just need an office address.
The consultation proposes that new pension schemes should only be authorised where the sponsoring employer is actively trading. This can be easily evidenced by legitimate companies via their accounts and is a long-overdue amendment.
Banning cold-calling
A lot of attention has been given to the proposed ban on cold-calling in relation to pensions. As the consultation points out, such a ban would not prevent determined fraudsters from picking up the phone, but it would allow the government and industry to promote the fact that a call of this type is definitely not legitimate, and to prosecute any callers caught out in this activity.
However, it would be good to see this extended to email and all digital communications.
Limiting the statutory right to transfer
This proposal should make it easier for trustees to prevent transfers to other pension schemes when there is a genuine concern about their legitimacy.
We already have a checklist of possible indications of a scam from the Pensions Regulator, but the Hughes v Royal London case showed that even where these are present, the trustees have no power to override the statutory right of a scheme member to transfer.
For most people this right is a very positive thing, but limiting its scope to exclude potentially fraudulent activity should be considered, too.
Changing the rules so that current or previous earnings is required to evidence genuine employment is simply logical, and should be implemented as soon as possible.
The consultation suggests scheme members complete a statutory discharge form.
However, it is likely that fraudsters, who can persuade people to sign a transfer application form, would have little difficulty in getting one more signature; so potentially this form would have little effect, if any.
Making it harder to invest in risky or unauthorised investments
Self-investment – via a self-invested personal pension or a small self-administered scheme – is attractive to many investors, and the ability to invest in a wider range of financial assets is undoubtedly suitable for some individuals, but it does create a greater risk of fraud.
In an SSAS, the trustee is often the employer or their representatives, and there is little to constrain the investment decisions made.
The consultation suggests this be changed with the reintroduction of pensioner trustees, who would be able to advise genuine trustees and prevent the intervention of fraudulent ones.
This is an unenviable role, but would undoubtedly reduce the scope for scams.
Financial advice
One area not addressed in the review is the issue of financial advice.
Many scammers refer to a financial adviser to lend an aura of legitimacy. Unfortunately, many are not genuine advisers or authorised for activities quite different to pension transfers.
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.
Currently, potential investors check the adviser’s registration with the Financial Conduct Authority; instead it could be made a requirement for any adviser connected with the promotion of unregulated investments through pension schemes to publish their specific permissions in promotional material.
It would not stop fraudsters who are prepared to be less than open and honest, but it would make it easier to prosecute them for this specific offence.
It would also do no harm to show the public in general that financial services are regulated and professional.
Fiona Tait is pension specialist at provider Royal London
