Individuals reported more than £19m of suspected pension fraud in 2015/16 and the government believes that ‘more direct intervention’ is required to tackle the issue. It has published a consultation paper on a package of proposed new measures aimed at tackling pension scams including:
- limiting members’ statutory transfer rights;
- banning cold calling in relation to pensions; and
- changing HMRC’s registration process for new pension schemes to make it harder for fraudsters to open small pension schemes.
The consultation closes on 13 February 2017. The government’s timescales for implementing the proposed new measures are not clear.
A new definition of ‘pension scam’
The consultation paper highlights that the defined contribution pension freedoms have widened the scope of pension scams activity in recent years and, recognising this, proposes a new, expanded definition of ‘pension scam’ - the marketing of products and arrangements and successful or unsuccessful attempts by a party to:
- release funds from an HMRC registered pension scheme, often resulting in a tax charge not usually anticipated by the member;
- persuade individuals over the age of 55 to flexibly access their pension savings in order to invest in inappropriate investments; and/or
- 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. Respondents are asked if this new definition covers all of the key areas of potential detriment for consumers.
Limiting members’ statutory transfer rights
Pension scams are often facilitated by a transfer to an apparently legitimate pension scheme. Under the current pension transfer legislation it can be very difficult for trustees and pension providers to refuse a transfer even when there are concerns that the receiving scheme is not legitimate. The limits on trustees’ ability to block transfers were highlighted earlier this year in the case of Hughes v Royal London (click here for our article on the decision) where the court adopted a wide interpretation of the statutory transfer requirements and held that a member needn’t have an earnings link with the sponsoring employer of a receiving scheme. This decision effectively ruled out one potential route for trustees and pension providers to refuse transfers where they have suspicions of a pension scam.
The government is proposing to amend the statutory transfer provisions so that a member will only have a statutory transfer right 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 can 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 scheme is an authorised master trust.
Transfers that don’t meet these requirements would still be permitted at the trustees’ or pension providers’ discretion in accordance with the scheme rules, i.e. as non-statutory transfers.
The consultation paper acknowledges that this proposal is not without its difficulties (for example, in circumstances of zero hours contracts where regular earnings may not exist) and moots alternatives including requiring ‘insistent’ members to sign a discharge in relation to pension scams risks and/or introducing a 14 day statutory cooling off period for pension transfers.
Cold calling and HMRC registration
The government believes that cold calling is the most common method used to initiate pension fraud with 97% of cases brought to Citizen’s Advice involving pension scams stemming from cold calling. The government is proposing to tighten the existing rules on cold calling to impose a complete ban on cold calls in relation to pensions and to give the Information Commissioner’s Office (ICO) power to impose fines on those who breach the ban.
In addition, to address perceived issues with the use of small self-administered schemes (SSASs) by pension scammers the government is proposing that only active (i.e. non-dormant) companies will be able to register a new pension scheme with HMRC.