Pádraig Floyd explores the prevalence of pension liberation fraud and what is being done to tackle the problem
We all know that pensions are a good idea, but what we have to accept in exchange for generous tax break is that we can’t access our money until the age of 55.
Yet, there have always been those willing to try and release their money and in the current economic environment, increasing numbers are willing to help them do just that.
Pensions liberation is a process whereby a scheme member transfers their fund into another pension in order to get their hands on the cash, rather than provide a retirement income. But if you are caught, such an unauthorised payment will attract a punitive 55 per cent tax charge against the fund.
The Pensions Regulator (TPR) has stated the amount that is known to have been liberated from funds rose to around £400 million in 2012 and it currently has 21 cases on its books. This, it says, is likely to be affecting thousands – and quite probably tens of thousands – of UK scheme members.
The scam is simple, and effective. People are sold the idea of transferring their pension into a new scheme and often inducements are offered, such as 20 per cent or 30 per cent of their fund as cash. Some are then offered a fee for introducing friends and colleagues to the new scheme. After five years of recession, many people are more concerned about keeping their house than maintaining their pension and this plan seems to offer them a chance to do both. However, they simply don’t realise the dangers.
These scams may release money to the member, but fees are high, around the 30 per cent margin, and could be more. That may also be the last they ever see of their pension, as those operating these schemes are con men and will disappear. So if they are lucky, they will be left with a third of their pension pot, but no pension and a hefty tax bill.
Keep ‘em peeled
Combating fraud requires vigilance and no scheme should consider itself beyond the reach of the scammers, says Sackers head of dispute resolution Katherine Dandy.
“It is a problem for trustees and administrators, but many seem to think it happens to other schemes and not theirs,” says Dandy. “This is not theoretical – it is a real issue.”
No scheme is immune and the better the scheme; the more likely it is to be targeted.
“It’s a perfect storm,” adds Dandy. “Vulnerable members are not alive to the risks, the fraudsters blind them with science and if they have a generous pensions pot from a decent DB scheme, they will be targeted.”
Upping the ante
An unintended consequence of TPR drawing attention to the problem, has been for the fraudsters to redouble their efforts. There’s a sense of ‘buy now while you can’ about the activity, says JLT Trustee Solutions director and chairman of Pensions Administration Standards Association (PASA) Margaret Snowden.
Snowden accepts this may be a blip while the joined forces of TPR, HMRC, the Financial Conduct Authority (FCA), Serious Fraud Office and Serious Organised Crime Office put in place a structure to tackle the problem, but it places scheme administration under pressure.
Many of these schemes are not offshore, but UK-registered and it is up to scheme administrators to ensure they are valid. If the scheme is registered with HMRC, it can accept transfers, though administrators may delay a transfer while they make checks. This is when administrators often come under pressure from members and their advisers. It is also quite common for members who have been duped to approach the administrator, claiming more should have been done to stop them transferring, says Snowden.
“I’m concerned that some who push for their money may then come back and try and get the trustees to reinstate them to the scheme or to pay their costs.”
Some trustees are also placing their administrator under undue pressure to make the transfer quickly, she adds. Despite the statutory limit being six months, in some cases, trustees have warned administrators of a potential breach of service level agreements if a payment is not made quickly.
A question of support
Barnett Waddingham administration manager Sue Foley says the greatest obstacle to processing transfers is the bottleneck experienced when dealing with HMRC.
“Regulation requires due diligence checks, however HMRC says it takes 15 working days for them to get an answer back to us about a particular scheme.
“It would be much better if this database was online where it can be easily checked.”
Foley has overhauled all of Barnet Waddingham’s processes and have also focused communication solely on the member.
“We have stopped sending packs out to third party advisers, because we need to know the member has received all documentation.”
Though ultimately a trustee decision, Foley believes better guidance is required about making transfer payments.
“If it is a valid application to a regulated scheme, they are legally obliged to make the transfer, but if there are any problems, it will come back to trustees. They are caught between a statutory obligation and a moral obligation to the scheme, and they should take legal advice.”
However, the industry should not expect any rapid change of policy from the regulators.
TPR will not be rushed into any further guidance, stating what has been produced to date offers adequate protection and that trustees can always approach them on specific cases.
A TPR spokesperson said: “What we have published so far is the first step and we continue to monitor the situation. We are currently liaising with the industry to gather views on the publications and we will consider the feedback we receive and if any further work is needed.”
HMRC is also content that it offers considerable protection to schemes.
A HMRC spokesman told Pensions Age its compliance teams have directly intervened to tackle schemes directly involved in liberation and works closely with other regulators “to detect disrupt and deter pensions liberation activity”.
“HMRC will take firm action to detect and pursue those who deliberately bend or break the rules by offering schemes to access pension savings other than as intended by parliament and has created a counter fraud and avoidance team to tackle abuse of the pensions tax rules through pension liberation schemes.”
Implementing an online database of schemes may provide quicker access to the list, but cannot replace due diligence and vigilance, says HMRC.
In 2011-2012, HMRC registered 9,000 schemes, which makes for a lot of legwork and it would have to be determined if there was any agency who would want the responsibility – or cost – of building such a system.
It’s getting harder
Fraudsters are not only using normal occupational schemes, but also small self-administered schemes (SSASs) and self-invested personal pensions (Sipps).
The Sipp industry in particular has been alive to this issue for many years, but administrators have been ‘piggy in the middle’, says James Hay’s head of technical support and Association of Member-directed Pension Schemes’ honorary secretary Neil Macgillivray.
“If it looks like a legitimate request, there is little you can do as an administrator. You’re taking a risk if you decide you’re not going to make the transfer as there is not much legal protection,” he says.
This is being made more difficult by the fact that the fraudsters are coaching members in the answers they should provide.
He would like to see a proper register, particularly as technology may begin to make fraud easier to get away with.
“We are being pressurised as an industry to automate transfers,” says Macgillivray. “This would see hundreds of schemes being transferred at one time.”
What to look for
TPR provides a list of warning signs, which includes:
• the scheme is not registered or only newly registered with HMRC
• member is seeking to access their pension before age 55
• member is pressuring for a speedy transfer
• the approach was unsolicited by phone, text, email
There are other signs, too, says Snowden: “Look at the name and check the registration. Is it real or trying to sound like an established scheme?
Another red flag should be if the directors of a scheme have a history of ‘phoenixing’ companies – going bust and restarting another almost identical – as it might indicate a potential scam in the offing.
Check the paperwork – if it is shoddy, the writing hardly legible or full of errors, be suspicious.
“Finally, ask questions directly of the transferee, such as whether they have been offered a cash payment.”
There is a danger that administrators who take positive action and miss one may become liable for letting one slip through the net, adds Snowden, but it should offer greater protections against fraud.
Schemes should also be wary where a number of cases are coming through from the same adviser or scheme, warns Dandy. She recommends trustees ensure the member has all TPR literature and demands a letter from the member stating they have read and understand the dangers before releasing the transfer.
“You can only help people so far and trustees are not in a position to advise members,” says Dandy. “The trustees need to be strong and not be hounded into making a payment. But trustees are between a rock and a hard place as the member will know they have a right to the transfer.”
Pádraig Floyd is a freelance journalist