The Pensions Regulator (TPR), HM Revenue & Customs (HMRC) and other government agencies have joined forces in an attempt to combat the threat to individuals posed by pension liberation fraud.  As part of this campaign, trustees and pension providers are being encouraged to raise awareness of this issue amongst their scheme’s members and to be alert to potentially fraudulent pension liberation schemes when processing members’ transfer requests.

What is pension liberation and what are the potential dangers?

Pension liberation is the transfer of an individual’s pensions savings from their current scheme, to a scheme which allows them to access some or all of their savings before age 55. In some cases, this can be perfectly legitimate. However, TPR is concerned that some schemes are being operated illegally and are targeting the financially vulnerable, often via mass text messages or cold calling. TPR is also concerned that members are being misled about the consequences of these schemes. 

There are many features of pension liberation which need to be considered carefully by an individual before they transfer their pension savings, including:

  • There are significant tax consequences where an individual accesses their pension savings before age 55 (except in very limited circumstances). These tax charges and penalties can amount to more than half the value of a member’s pension savings. However, those being targeted by liberation schemes are often not informed about the tax consequences.
  • Liberation schemes usually charge high commission fees which typically range from 10% to 30% of the value of an individual’s pension savings.  The existence of such fees is not always made clear.
  • Individuals might be given very limited information about what will happen to their remaining funds.  Some schemes invest individuals’ money in opaque and risky investments which may not meet the legal requirements relating to the investment of pensions funds.
  • Many liberation schemes structure the cash back to the individual by way of a loan.  However, such loans are likely to be unauthorised payments and subject to penal repayments terms, which are often not disclosed to the individual.

These features can mean that individuals who transfer their pension savings to a liberation scheme are significantly worse off in retirement than they would otherwise have been.  Further, where an individual is misled about the risks of transferring their pension savings into a liberation scheme, this may amount to fraud.

Multi-agency campaign

TPR, HMRC and a number of other government agencies have joined forces in a bid to prevent pension liberation fraud. Action Fraud has been established as the key point of contact to which reports of suspected pension liberation fraud can be made.

TPR has a number of powers to assist in combating pension liberation fraud, including the power to suspend trustees of suspect schemes, appoint new trustees to such schemes, issue financial penalties and freeze scheme monies.  However, TPR is also keen to raise awareness of these fraudulent practices and the risks of participating in a pension liberation scheme among pension scheme members. To do this the Regulator is asking pension scheme trustees and pension providers to raise awareness among their scheme’s members. TPR has published an action pack which contains information on pension liberation fraud and a checklist to help identify potentially fraudulent schemes. 

Dealing with transfer requests

TPR has also produced a leaflet which it is asking trustees and pension providers to include in information that is sent to members who request a transfer. TPR hopes that sending this leaflet to members who request a transfer will become standard practice for all schemes, as part of trustees’ satisfying their fiduciary duty to act in the best financial interests of members.

As well as raising awareness of pension liberation fraud, TPR has also said that it expects trustees and pension providers to look out for warning signs of potentially fraudulent pension liberation schemes when a transfer requests is submitted by a member. Typical warning signs might include:

  • being asked to make a transfer to a scheme that is not registered with HMRC (or one that is newly registered)
  • being asked to make a transfer to a scheme with an employer that does not exist, is not trading or that has only recently been established
  • the member being under time pressure to complete the transfer
  • several requests being received to transfer funds to a previously unknown scheme
  • the member knowing very little about the receiving scheme
  • all or part of the funds being transferred overseas.

If trustees or pension providers have any concerns in relation to a transfer request they should make further enquiries about the scheme to which the member’s pension savings are to be transferred and the employers and trustees connected with that scheme. Trustees and pension providers can also contact TPR to find out if it is investigating the scheme. TPR also publishes a list of prohibited trustees and schemes against which it has issued a determination notice on its website. Unfortunately, however, TPR has said that it cannot direct a scheme not to effect a transfer.

Trustees that engage third party administrators to process transfer requests should speak to their administrators as soon as possible to understand how their administrator is responding to TPR’s statements on pension liberation schemes. Trustees also need to establish:

  • what checks the administrators will carry out before processing a transfer request, and
  • a process by which the administrator can report concerns about a potential transfer to the trustees in a timely manner.

Trustees are under a legal requirement to give effect to a transfer where they receive a valid request from a member and where the receiving scheme meets the relevant statutory requirements. Individual trustees who fail to do this can be fined up to £5,000 each by TPR. Corporate trustees can be fined up to £50,000. However, TPR has indicated that where trustees have evidence that the receiving scheme is a pension liberation scheme, it will take this into account when deciding whether to impose a fine.

Therefore, if trustees delay or refuse a transfer payment due to concerns that the transfer may involve a pension liberation scheme they should retain any evidence that gave rise to their suspicion. Trustees should also contact the relevant member to raise their concerns directly with them and to draw the potential risks of completing the transfer to the member’s attention. They should also give the member an opportunity to establish that the transfer is legitimate.

Where trustees have concerns about a potential transfer payment they should also seek legal advice.

Industry reaction

Although the industry recognises the need to combat pension liberation fraud, the current campaign has come under criticism from some who feel that too much responsibility is being placed on trustees and pension providers, without the necessary backing from TPR, particularly as they will not currently sanction a refusal to effect a transfer request. 

The current registration process for schemes, with both TPR and HMRC, has also been criticised for not being rigorous enough. TPR has indicated that these processes are under review, but has provided no further details at this stage.