UK Pensions Speedbrief: Tackling pension scams – what comes next?
A joint consultation by HM Treasury and the DWP on proposals designed to tackle the rise of pension scams has recently closed. The consultation put forward various proposals for reform, including the much-publicised suggestion of an absolute ban on pensions “cold-calling”, as well as possible restrictions on the current statutory right to transfer pension rights to another scheme.
In the consultation paper, the Government acknowledged concerns that the introduction of pensions flexibilities in April 2015 may have made pension savers more vulnerable to scams, with many being persuaded to withdraw their entire pension savings as a single lump sum (possibly with adverse tax consequences) in order to re-invest it in unsuitable, or even fraudulent, unregulated investments.
Background and proposals
In view of the wider range of pension scams now being encountered, the consultation paper broadly identified the kinds of activity being targeted as any attempt to:
- encourage members to release funds from a registered pension scheme (often resulting in the member facing unanticipated tax charges);
- persuade members over age 55 to flexibly access their pension savings in order to invest in inappropriate investments; or
- persuade members under age 55 to transfer their pension savings in order to invest in inappropriate investments.
The three key areas of reform proposed in the consultation paper were:
- banning all cold-calling “in relation to pensions”;
- limiting members’ statutory right to take a transfer payment; and
- tightening HMRC registration criteria, so that a new occupational pension scheme can only be registered by an active (ie. non-dormant) company.
To prevent scammers finding ways around it, the proposed ban is deliberately wide, covering any kind of unsolicited call “in relation to” an individual’s pension rights. The types of calls targeted include offers of free ‘pension reviews’, inducements to transfer or release pensions, promotions of drawdown or annuity products, and introductions to a third party firm dealing in pensions investments.
The only proposed exclusions are any calls made where there is an existing client relationship or at the “express request” of the consumer (which would not include where consumers fail to opt out of third party marketing calls when purchasing an unrelated product). The consultation paper also specifically asked for views on whether the ban should be extended to all forms of electronic communication, including email, fax and text message.
It is suggested that the Information Commissioner’s Office would be responsible for enforcement of the ban, using its existing enforcement powers under the Privacy and Electronic Communications Regulations (which include ‘stop now’ orders and penalties of up to £500,000 for serious breaches).
While the consultation paper recognised that it is unlikely that the ban will stop all cold-calling, the Government noted that it would send a very clear message to consumers: you will never receive a legitimate cold-call in relation to your pension.
Statutory right to transfer
The consultation paper noted that pensions scams will frequently involve transfers to other pension schemes that are presented to consumers as legitimate. Because the statutory cash equivalent transfer regime usually gives members the right to insist upon a transfer, trustees frequently find themselves in the difficult position of having to choose between making a transfer despite strong suspicions that the receiving scheme is a scam vehicle, or blocking the transfer and then facing a possible complaint from the member.
To address this problem, the consultation paper proposed restricting the statutory transfer right to transfers to:
- personal pension schemes operated by an FCA-authorised entity;,
- authorised master trusts; or
- occupational pension schemes where a genuine employment link with the receiving scheme can be demonstrated, with evidence of regular earnings from a participating employer.
(The consultation paper did not mention transfers to QROPS – qualifying recognised overseas pension schemes – despite these being currently permitted. It is not clear whether this omission was deliberate.)
The new requirement for evidence of an employment link would reverse the 2016 High Court case of Hughes v The Royal London Mutual Assurance Society Limited (see our earlier speedbrief here), which concluded that the statutory right to transfer cannot be blocked by trustees on the grounds that there is no such link.
As an alternative, the consultation paper also suggested that an insistent member could be asked to sign a discharge letter confirming that he has understood any warnings given by the transferring scheme. This could be accompanied by a ‘cooling-off’ period, in order to allow a member time to reconsider the decision to transfer.
The consultation paper also sought views regarding the impact of these restrictions on non-statutory transfers.
Registration of new schemes (and the problem of SSASs)
Finally, the Government also acknowledged the ease with which a pension scheme may be registered with HMRC and a growing body of evidence that the fact of registration is misrepresented by scammers and/or misinterpreted by consumers as a form of official ‘approval’.
To address this concern, the consultation paper proposed that only active (i.e. non-dormant) companies should be allowed to apply for HMRC registration, since (in the Government’s view) there are few, if any, legitimate circumstances in which a dormant company would need to register a pension scheme.
This issue is linked to a more general concern about the use of small self-administered schemes (“SSASs”) to perpetrate pension scams, and in particular single-member SSASs, which are no longer required to register with the Pensions Regulator or to have an independent pensioneer trustee. The consultation paper sought views on ways to prevent SSASs from being used as scam vehicles.
The Government’s acknowledgement that more direct intervention is required in order to stem the growth in pension scams is welcome. An estimated one in ten defined contribution pension transfers in 2015/16 were made on the advice of a fraudster, so the outcome of this consultation will be awaited with considerable interest by the pensions industry.
Although it is unrealistic to expect that (for instance) a cold-calling ban could eradicate scam activity, the measures proposed in the consultation paper would go some way to reducing the success rate of these scams. It remains to be seen to what extent responses will call for the Government to go further in empowering trustees to tackle scams.
The proposal to limit the statutory right to a transfer may be welcome to trustees when faced with a request from a vulnerable member to transfer to a suspicious scheme. However, there is a risk that scammers will be able to find ways to manufacture the required evidence. In addition, any change that limits the right to transfer could increase trustees’ discretion whether to agree to a transfer. Whilst this could potentially add to the risk of claims from members objecting to the way in which any discretion is exercised, the reality is that there is no risk free route and trustees are already in the firing line on transfers. Overall, an approach which calls on the good judgment of trustees is probably the best way to try and defeat the scammers.
Given the rise in levels of self-employment and zero-hours contracts, the proposed requirement for an earnings link will also require further thought if it is not to cause difficulties for particular categories of pension saver.
Eversheds Sutherland has submitted a detailed response to the consultation.