This article explores the joint consultation issued by the Department for Work and Pensions (DWP) and HM Treasury (HMT) regarding plans to tackle pension scams.
Pensions are usually one of the largest financial assets that people will own in their lifetime. However, they are an attractive target for fraudsters. Pension scams can cost people their life savings, with little opportunity for them to be re-built.
The threat of pension scams has increased significantly, particularly in light of the pension flexibilities for accessing money purchase benefits introduced in April 2015. In light of the increased threat, the DWP and HMT published a joint consultation on 5 December 2016, aimed at introducing new measures to tackle pension scams.
What is a pension scam?
Pension scams have commonly been aimed at individuals who have not yet reached minimum pension age (usually, age 55). Such individuals might be fraudulently encouraged to transfer their pension into another scheme on the pretext of obtaining cash, tax free, which may actually result in a tax charge of up to 55%.
In light of the April 2015 pension flexibilities, scams have also been taking other forms, including encouraging individuals to access their pension savings flexibly to invest in unregulated investments. The consultation document raises concerns that fraudsters may shift to wider types of activities through which to effect scams involving pension savings. In its consultation, the government has therefore suggested a new definition of activities that can be considered pension scams. It is as follows:
'The marketing of products and arrangements and successful or unsuccessful attempts by a party (the 'scammer') to:
- release funds from an HMRC registered pension scheme, often resulting in a tax charge that is normally not anticipated by the member
- persuade individuals over the age of 55 to flexibly access their pension savings in order to invest in inappropriate investments
- persuade individuals under 55 to transfer their pension savings in order to invest in inappropriate investments
where the scammer has misled the individual in relation to the nature of, or risks attached to, the purported investment(s) or their appropriateness for that individual investor.'
Measures to tackle pension scams
The consultation document sets out three main proposed measures aimed at tackling pension scams:
1. A ban on cold calling in relation to pensions to help stop fraudsters contacting individuals
The consultation notes that cold calling is thought to be the most common method by which pension scams are initiated. The government is proposing to introduce a ban on all cold calling in relation to pensions. The government considers that this will send a clear message to all pension savers that no legitimate firm will ever cold call them regarding their pension.
The proposed ban is not intended to apply to legitimate interactions, where pension savers have expressly requested information from a firm (such as their existing pension provider) or where an existing client relationship exists (for example, with a financial adviser with whom the saver has had previous appointments).
Although the proposal relates to phone calls, the government is seeking views on extending the ban to other forms of communications.
2. Limiting the statutory right to transfer to some occupational pension schemes
Pension scam activity is often focused around transfers to other pension schemes. Scheme trustees/ managers can find themselves in a difficult position when a scheme member requests a transfer, but there are suspicions over the receiving scheme. Where a member has a statutory right to transfer, to refuse the transfer the transferring scheme trustees/ managers must be able to show that the transfer falls outside of existing legislation.
In early 2016, trustees'/ managers' ability to refuse statutory transfers was explored in the case of Hughes v Royal London. The High Court ruled that, when implementing a statutory transfer, there is no requirement to consider whether the person seeking the transfer has any earnings link with the receiving scheme's sponsoring employer. Hughes v Royal London is considered in more detail in the article: An unfortunate boost to potential scammers?
The government outlines in the consultation that its view is that there is no explicit rule in current legislation that states there must be an earnings link to facilitate a statutory transfer. However, the government is proposing to implement new legislative restrictions, such that a statutory right to transfer will exist only where:
- The receiving scheme is a personal pension scheme operated by an FCA authorised entity;
- A genuine employment link to a receiving occupational pension scheme can be demonstrated, with regular earnings from that employment and confirmation that the employer has agreed to participate in the receiving scheme; or
- The receiving occupational pension scheme is an authorised master trust.
The government notes that an alternative to limiting statutory transfer rights might be to require scheme members who insist on a transfer, notwithstanding suspicions over the receiving scheme, to sign a declaration confirming that the individual understands the nature of the risks. This may be coupled with a 14 day cooling off period to allow the member to reconsider the decision to transfer.
For non-statutory transfers, the government will continue to expect scheme trustees/ managers to make all reasonable efforts to agree a transfer request if there is no reason not to do so.
3. Making it harder to open fraudulent schemes
Pension schemes wanting to benefit from generous tax reliefs must register with HMRC. However, registration with HMRC does not mean that the scheme is formally regulated. The government considers that it will be harder for schemes to be registered with HMRC for fraudulent purposes if only active (and not dormant) companies can register a scheme with HMRC. The government considers there are few legitimate circumstances in which a dormant company might wish to register a new scheme.
The government also welcomes views on the regulation of small self-administered schemes (SSASs). SSASs do not have to be registered with the Pensions Regulator, and can be used where there appears to be no business activity by the employer setting up the scheme. As such, SSASs are often used by pension scammers, for example, to convince individuals to set up SSASs and transfer their (existing) pension savings to such arrangements to 'allow' access to inappropriate investments.
The government is seeking views on its proposals, with the consultation running until 13 February 2017. Given that the pensions industry has long indicated a need for further regulation in relation to pension scams, it is expected that the proposals will be welcomed, particularly the requirement for a genuine employment link where a member requests a transfer to an occupational pension scheme.
It is not currently clear when the government anticipates implementing its measures once the consultation is complete.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.