Pension scams continue to be a widespread problem. Whether in the form of unauthorised access to pensions savings, encouraging members to access their pension funds to free up money to invest in unsuitable investments, or encouraging members to transfer their pension funds to another scheme to invest in unsuitable investments, scams can have devastating financial consequences for members. The government recognises this and has published a consultation on three sets of proposals for dealing more effectively with them.
All of the proposals are encouraging, but pension scheme trustees will be particularly interested in proposals to limit the statutory right to transfer, which we explain below.
Ban on cold calling
The consultation proposes a ban on cold calling in relation to pensions to help stop fraudsters contacting individuals. The government considers that this will cut off the main mechanism used by pension scammers to persuade people that they are offering legitimate pension investments and services. It also anticipates that this will significantly simplify the anti-fraud message to the general public. The ban will be publicised so that everyone understands they should never be cold called about their pensions.
There are rules on cold calling in general already in place and enforced variously by the Financial Conduct Authority, the Information Commissioner’s Office (the ICO) and Ofcom. However, these powers do not extend to enabling a full ban on pension cold calling. The government therefore proposes new primary legislation to ban pension cold calling. It will give the ICO the power to enforce this ban, including the power to issue fines of up to £500,000.
The consultation seeks views on the scope of the ban, in particular so that it does not prevent legitimate interactions, for example where consumers have expressly requested information from a firm, or where there is an existing client relationship. It also seeks views on extending the ban to cover not just telephone calls but all electronic communications, including e-mail and text messages.
Limiting the statutory right to transfer
The consultation acknowledges that pension scheme trustees can find themselves in a difficult position where they have concerns about the legitimacy of a scheme to which a member wants to transfer. They must undertake due diligence but, if they conclude that the member has a statutory right to transfer, they have little choice but to make the transfer payment.
It also notes the recent High Court decision which confirmed that it is not necessary for a member seeking to transfer to be in receipt of earnings from a receiving scheme employer. In practice, non-receipt of earnings might be an indicator for a fraudulent scheme.
To help protect pension scheme members, the government proposes limiting the statutory right to transfer to another occupational pension scheme. Under this proposal, a statutory right to a transfer would exist only where:
- the receiving scheme is a personal pension scheme operated by an FCA-authorised firm or entity;
- a genuine employment link to the receiving occupational pension scheme could be demonstrated, with evidence of 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.
As an alternative to limiting the statutory right to transfer in this way, the government seeks views on introducing a requirement that insistent members, being members who wish to transfer despite being warned of the risks, be required to sign a declaration before their transfer proceeds. Here, the member would declare that they have understood the scam warnings given to them and the risks of transfer. This could limit the member’s recourse to the transferring scheme. It could also be coupled with a cooling off period (for example, 14 days), to give the member time to reconsider their decision to transfer.
Making it harder to open fraudulent schemes
At the moment, schemes that wish to benefit from tax breaks available to registered pension schemes must register with HMRC. The consultation notes that pension scammers are setting up schemes that are HMRC-registered, and then using HMRC registration as a label to legitimise a scam or the investments being made by the scheme. The consultation notes that this is particularly an issue in relation to Small Self-Administered Schemes (SSASs), as “there is no requirement for single-member occupational pension schemes to be registered with the Pensions Regulator … and such schemes can be used even when there appears to be no business activity by the employer setting up the scheme” …”TPR’s view is that SSASs are increasingly marketed as ‘products’ offering exotic investments and unrealistic returns, and there is evidence that some consumers have lost their pension savings as a result”.
Changes have already been made to the HMRC registration procedure to try to stop fraudulent schemes from registering. As a further measure, the government suggests introducing a requirement that only active (i.e. non-dormant) companies can be used for new scheme registrations. This is on the premise that it is difficult to imagine legitimate circumstances in which a dormant company might wish to establish a pension scheme.
With specific regard to SSASs, the government seeks views on “longer term options that could make it harder to abuse small schemes as a means of committing pension fraud”: specifically, additional steps to regulate them or further restrictions on the opening of new schemes.
For trustees of occupational pension schemes, the proposal to limit the statutory right to transfer has the most potential impact. If the government gets the final legislation right, this could clarify what is currently a difficult area for pension trustees, and simultaneously provide better protection for members. We will keep you updated on the progress of these proposals. The consultation is open until 13 February 2017.