There has been a lot of talk in the media recently about compensation being paid to a number of pension fraud victims. The Pensions Regulator (TPR), The Pensions Ombudsman (TPO) and government have quoted £80m having been paid. Lots of back-patting going on.

However, this is misleading and unhelpful and has resulted in commentary about how fraud victims have not lost out and how right has been done. I thought I ought to clear up this misrepresentation that is ironically doing further damage to the victims.

After 15 years, the Fraud Compensation Fund (FCF) has indeed concluded that fraud was at the heart of losses to certain pension schemes that were set up by unscrupulous characters in the 2010s.

Hooray!

This fraud was carried out by bad actors and not by the members of those schemes – bad actors who misrepresented and acted against their fiduciary duties to those members.

The decision by the FCF is good and correct and I for one am incredibly grateful to the challenging work they undertook to get to this point - that is why it was set up in the first place. The decision reinforces the statements by hundreds of members of those schemes that they were unwitting victims of the same managers, enablers, and promoters of the schemes.

So far so good.

What must be stressed is that NO COMPENSATION FOR FRAUD is paid to members of the schemes who lost their savings because of the frauds!

The compensation from the FCF goes directly to the scheme trustees to make up the schemes’ losses from the fraud. That itself is good news, but it is not a happy end to the story.

How it works is that the trustees of a scheme where inappropriate actions took place resulting in losses to the funds (typically by investing in unregulated assets or actual theft) apply for compensation.

They may or may not succeed as the bar for fraud is quite high. The inappropriate actions are often only uncovered when the Pensions Regulator is alerted to problems with the scheme.

If the problems are serious enough TPR will remove the trustees and appoint a new trustee to manage the scheme going forward and where needed, to forensically investigate the losses and try to recover missing assets.

This work can and does take years and needs to be paid for from the remaining assets, just like a “normal” pension scheme. The aim is to recover as many assets as possible, then wind up the scheme. As you can imagine, very few assets are recovered.

After fees and other liabilities are settled, the trustees distribute the remaining assets to the members in line with the scheme rules. The losses by the scheme are not fully made up, so in most cases there will be a deficit.

The money does not go to the members. In practice the trustees transfer the remaining assets to another scheme, in these cases to the Standard Life Master Trust, who then run the scheme as a normal pension scheme and pay benefits to members as due. As most members are now beyond normal retirement date, benefits will become payable immediately.

So, what is wrong with that I hear you say?

What no one tells you is what happens about cash or loans that members got from the schemes as an incentive to transfer at the outset when they were persuaded to move to the fraud scheme (by those same bad actors). Importantly, the voices are also silent about the tax.

A few facts:

1. Members who got money from the scheme at the start will have that money deducted from any benefits they would have been entitled to under the scheme rules. That is fair, as they had the money earlier. This ensures they do not get it twice and more importantly, that other members who got no cash earlier do not suffer.

2. Members who received cash before age 55 (most of them) or cash that exceeded 25 per cent of their fund still face a tax demand of 55 per cent of those amounts, plus interest from c2011 (at about 8 per cent pac).

Even though they have effectively repaid the cash by having it deducted from their benefits. HMRC has been pursuing members for this tax for more than 10 years. Having been a victim of fraud is no defence, so the tax charges must be paid. It is likely that the tax will be paid directly to HMRC by the trustee before any money reaches the victims. In many cases the tax liability will wipe out any pension.

3. The schemes themselves also suffer tax charges for paying out benefits early. Happily, for the schemes, the FCF compensation covers those tax charges (it does not cover individual tax charges), so HMRC gets what it is due, and the scheme is no worse off.

Yippee! But hold on, who pays for the FCF compensation? It comes from the levy on other pension schemes, so one could argue that the only real beneficiary in all this is HMRC (Oh and the scammers of course!).

What of the victims then? I have been collecting hardship and trauma testimonials from many of them. It breaks my heart. See below for a selection of statements made to me. Too many are mentally and physically scarred by the fraud and by the relentless pursuit of tax charges by HMRC for up to 15 years.

Psychologists have warned of the risk to life. No one deserves this – especially as the perpetrators of the fraud are free to continue scamming. And especially as many of the fraud schemes were registered by HMRC in the first place.

HMRC is not wrong to pursue tax charges when people break the rules. On the contrary, we want everyone to pay their fair share of tax.

That should include tax evaders and scammers who cheat people and walk away with their tax advantaged savings. What is wrong is the lack of care, empathy, and allowance for circumstances where individuals are not “tax avoiders” but were deceived by professional advisers into doing something that costs them the rest of their lives.

We ought to be better than this.

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