Pension scams – Sackers’ response to DWP/HMT consultation
The DWP and HMT are jointly consulting on a package of measures aimed at tackling three different areas of pension scams:
- a ban on cold calling
- limiting pension scheme members’ statutory right to transfer
- making it a requirement that only active companies can register a pension scheme, to discourage inappropriate use of single-member occupational pension schemes.
In this response
- General comments
- Definition of a scam
- Banning cold calling in relation to pensions
- Limiting the statutory right to transfer
- Making it harder to open fraudulent schemes
We very much welcome the government’s efforts to clamp down on pension scam activity as we continue to see pension scheme members targeted, and the perpetrators of scams develop new ways of doing this.
One approach that our clients have found helpful in managing pension transfer requests is to use what we refer to as “red flag letters”. Where trustees have serious concerns about a proposed receiving scheme, for example, because it deals in unregulated investments or opportunities which seem “too good to be true”, they will write to the member outlining their concerns, setting these against the scheme transfer checklist in the Pension Regulator’s Scorpion guidance for pension professionals. The red flag letter asks the member to reconfirm their request to transfer in writing. It also includes a declaration which the member is asked to sign, confirming that they have read and understood the risks which are being highlighted to them, the fact that it was recommended that they fake independent financial advice (whether or not the “advice requirement” is in play in relation to safeguarded benefits over £30,000) and whether or not they have in fact taken any advice.
While such an approach does not form part of the existing statutory transfer process, given the very limited scope for trustees to refuse to make a transfer where the statutory tests are met, this has helped discourage members from pursuing potentially unsuitable transfers in some cases.
Some clients receive many transfer requests and will approach us to review those where they have concerns. The majority of these will trigger the issue of a red flag letter (in the region of 10-20 per year for larger schemes). The transfer values in question vary but tend to be below £100,000, with a significant proportion below £10,000. It is the perceived risk of a scam, rather than the value of the benefit itself, which triggers the issue of a red flag letter.
We note that, in the light of the pension freedoms, Project Bloom has developed a definition of “pension scams” which focuses on a wider category of activities than previously considered.
We welcome the widening of the definition, as set out in 2.1 of the consultation document. However, one observation we have is that the focus of the new definition is on funds transferred out of “pension schemes”. As the consultation suggests, pension scam activity is becoming more prevalent in the new world of retirement flexibilities. Funds may be transferred out of pension schemes, apparently legitimately, and then subsequently used to access scam or otherwise unsuitable arrangements. We therefore question the rationale for limiting the focus to funds in registered pension schemes.
Unsolicited methods of contact
The consultation focuses on cold calling, as statistics suggest this is the most common method used to initiate pension fraud.
In our experience, pension scheme members are commonly cold called, but text and email are also regularly used as unsolicited means to contact individuals with a view to encouraging them to transfer pension savings to an arrangement which may be unsuitable (for example, because of the risk profile of the arrangement) or a scam.
We often see evidence of members having received misleading and/or inappropriate advice in relation to potential pension transfers. Part of the problem stems from the fact that pension scheme members may have limited understanding of the value of their existing benefit. This means that, because they do not fully understand the benefits of their pension scheme membership, they fail to understand the significant risks associated with transferring those benefits. This creates an additional burden on trustees, who often try to understand why a member is raising or insisting on a transfer request, in circumstances which appear to the trustees to be unusual.
We recognise that unsolicited contact with individuals is difficult to police. In our view, getting across the message that no legitimate firm will contact (as opposed to simply call) pension scheme members, is essential to spreading awareness and ultimately to protecting members from unsuitable or fraudulent transfers.
Scope of the ban
The consultation lists (at 3.5) the sorts of phone conversations that the government intends to fall within the scope of the ban. We broadly agree with the suggestions.
In particular, we come across the first – “offers of a ‘Free pension review’, or other free financial advice or guidance” – frequently, and consider this to be rightly at the top of the list.
In relation to “promotions of retirement income products such as drawdown and annuity products”, we agree that this should be in scope in terms of cold calling. That said, the circulation of written materials (from a targeted mailing or email communication) can be useful in evidencing what an individual has been told about a particular investment, particularly when it forms part of a transfer process that has been initiated by the member.
Where the statutory tests are met, the current legislation gives trustees little scope to refuse to transfer a member’s benefits, even where the proposed receiving scheme displays the characteristics of a scam. We therefore welcome the government’s efforts to restrict members’ right to transfer in particular circumstances, with the aim of protecting individuals’ savings.
It is worth noting that the Hughes v Royal London case focused on the definition of “earner” in this context. The judge concluded that, while the individual who was looking to acquire “transfer credits” in the receiving scheme needed to be an earner, they did not need to be an earner in relation to an employer in relation to the receiving scheme itself. While the judgment provides clarity as to how to interpret the current legislation, it appears to be at odds with the original purpose of an occupational pension scheme, as defined in the PSA (see comments below on demonstrating a genuine employment link).
The consultation notes that “Pension scams activity is particularly focused around transfers to apparently legitimate pension schemes”, which encourage “people to invest in unregulated investments such as exotic or ‘too good to be true’ opportunities which collapse, taking the investments with them, or exposing the member to a high risk of capital loss.”
This is exactly the type of arrangement that we encounter frequently. However, what is proposed as a solution, does not necessarily address all the risks.
Statutory transfers: FCA authorised arrangements
We agree that a statutory right should continue to exist where “the receiving scheme is a personal pension scheme operated by an FCA authorised firm or entity” (paragraph 4.3).
Statutory transfers: Demonstrating a genuine employment link
The second point in paragraph 4.3 seeks to require the demonstration of a “genuine employment link to the receiving occupational pension scheme”. This fits with the intended purpose of an “occupational pension scheme”, as defined in section 1 of the Pension Schemes Act 1993 (PSA), to provide benefits to or in respect of people with service in employments.
However, while the proposal goes some way to addressing the risks associated with transfers out, it will not, in our view, necessarily achieve the government’s stated aim of helping people avoid putting their money into scams.
The proposal appears to be based on the assumption that, where there is a genuine employer, the underlying investment will be a good one. This is not necessarily the case. For example, we anticipate that the need for a genuine employment link could be relatively easily circumvented by drawing up contracts solely for the purpose of evidencing an employment link, even where the link itself does not in fact exist.
We agree with the suggestion that the onus should be on the individual to prove their employment link, including providing proof of earnings. To demonstrate regular earnings, we consider that the individual should be able to show a pattern of earnings over a period of at least three to six months, including evidence that they have in fact received those earnings, for example, by providing a series of bank statements.
On a practical level, a requirement to demonstrate a genuine employment link would mean additional checks for trustees to carry out, on top of an already significant burden in terms of the due diligence undertaken, and specialist advice sought, in relation to transfer requests. Guidance to assist trustees in assessing whether there is a genuine employment link will therefore be essential, including strict binary tests which administrators can check against.
In practice, many trustees rely on the due diligence carried out by third party administrators. But in complex cases, it can be difficult to assess the evidence relating to a proposed transfer without specialised knowledge and skills. Having guidance and checklist would help both trustees and administrators understand exactly what needs to be done in terms of assessing the individual’s relationship with the proposed receiving scheme. And if such an approach is coordinated with HMRC, it would also give comfort to a transferring scheme that, having carried out the required due diligence, it would not be pursued by HMRC for a scheme sanction charge, or else be able to use the “good faith” discharge.
One example we came across recently, which is typical of situations where trustees have serious concerns, but ultimately no power to stop a transfer from taking place, involved a request from a member based in Germany for a transfer of their benefits to a scheme in Malta. In this case, several warning signs of a scam were identified, including:
- penalties on the receiving scheme’s administrator from its financial regulator
- risky investments
- the member rushing to proceed with the transfer
- the financial adviser involved in the transfer appearing to be linked with the receiving scheme, and
- the member insisting on proceeding with the transfer despite receiving a red flag letter warning them of the trustees’ concerns and signing a discharge to confirm they were aware of the risks.
- In this case, because all of the statutory tests were met, the trustees could not refuse to action the transfer.
In contemplating amendments to the transfer rules, the broader picture also needs to be taken into account. This will include QROPS transfers, which do not require an earnings link, and the outcome of the related consultations, such as the DWP’s call for evidence on the way the “advice requirement” applies to members with safeguarded pension benefits who wish to transfer those benefits outside the UK and the joint DWP/HMT call for evidence on bulk transfers of DC pensions without member consent.
In our experience, the level of due diligence carried out by trustees will be the same in practice for non-statutory transfers as for statutory transfers. While not a legal requirement for approving a non-statutory transfer, whether or not there is a genuine employment relationship is a relevant factor to consider as part of the overall due diligence process and for the trustees in considering whether to exercise their discretion to grant a non-statutory transfer.
Non-statutory transfer requests, including partial transfers, have become increasingly popular since the advent of the pension flexibilities on 6 April 2015. This is largely due to the fact that the majority of occupational pension schemes are not currently offering in scheme drawdown or other flexible options. It is our experience that trustees engage actively when dealing with discretionary transfer requests, in the same way as when dealing with statutory transfer requests. The difference is that trustees generally feel comfortable refusing a request for a non-statutory transfer where they perceive a serious risk to the security of a member’s benefits.
As for statutory transfers, we would welcome guidance for trustees on the factors they should take into account when deciding whether to action a non-statutory transfer.
The consultation suggests that, as an alternative to limiting individuals’ statutory right to transfer, trustees could require “insistent” scheme members to sign a declaration similar to the example discharge letter in the industry code of practice on combating pension scams. For the most part, trustees already seek such discharges as part of their efforts to ensure that members understand the risks that they are taking. What is currently untested is the extent to which the transferring scheme’s trustees are protected as a result of obtaining such a discharge.
Cooling off period
The consultation also suggests introducing a statutory cooling off period, which would enable the transferring scheme to delay all transfers, for example by 14 days, to allow the member to reconsider their decision to transfer.
In our view, such an approach, which is passive and requires no action from the individual concerned, would make little difference in practice. We suggest that members are required to take active steps to reconfirm their request.
For many schemes, asking a member to reconfirm their transfer request is already part of their standard process. This option is used by trustees who have serious concerns about the receiving scheme. If that reconfirmation is not forthcoming within the time period specified in the trustees’ communication, the trustees will not process the transfer. As we note in our general comments, while such an approach does not form part of the existing statutory process for transfers, given the very limited scope for trustees to refuse to make a transfer where the statutory tests are met, this has helped discourage members from pursing a potentially unwise transfer in some cases.
If a cooling off period were to be introduced, it would need to be built into the statutory transfer process. Six months – which is the ultimate long-stop for processing statutory transfer requests (subject to any approval for an extension from the Pensions Regulator) – can already be a tight timeframe for tricky cases, particularly if the member makes their application to take the transfer immediately before the guarantee date expires.
In light of all the work that trustees and administrators need to do to consider potential receiving schemes and ensure that the due diligence carried out is thorough, the total period for effecting a transfer can be short. Reducing the period in any way is likely to be to the detriment of members. The important thing is for trustees and administrators to have sufficient time to carry out due diligence in a way that will protect members. We suggest that the process for requesting an extension to the statutory time limit is made simpler, with a view to discouraging people from taking risks and shortcutting the process, just so that they can meet the deadline.
In relation to this, we note that consideration of applications to extend the period for paying a CETV is one of TPR’s reserved regulatory functions, exercised by the Determinations Panel. As such, this can cause difficulties in practice for trustees to obtain an extension, meaning the process is generally too long and unfit for purpose.
The consultation refers to “evidence from correspondence and media stories” which suggests that individuals see registration with HMRC as implying that a scheme is in some way approved and that investments made by the scheme are therefore appropriately regulated. We agree that this is a common perception and frequently see evidence that individuals consider a particular investment to be sound on the basis of the mere fact that the scheme is registered with HMRC. It also makes it difficult to distinguish a clone scheme from a scheme which is on the list.
HMRC was given new powers from 1 September 2014 to help prevent pension liberation schemes being registered, and to make it easier for HMRC to de-register schemes. We are not aware of the extent to which (if at all) these powers have been exercised to date. In any event, there clearly remains a disparity between HMRC’s intention here and members’ perceptions.
It would be helpful if HMRC included scheme reference numbers on the list and all communications – this would make it easier to distinguish clone schemes.
The consultation suggests that pension scheme registrations should be required to be made through an active company. We agree with the proposal in principle, but have concerns that this could easily be circumvented if the requirement for an active company is not an ongoing one. As such, we would prefer to see a requirement for the company in question to be active at the point of transfer.