Private pensions are most at risk, with Crowe’s research putting the loss from investment fraud and payment fraud at £2.88 billion and £1.68 billion a year respectively, with an additional £330 million lost to payroll and purchasing fraud. Government and public sector pensions are estimated to be losing £1.1 billion a year.
While there is a vast honest majority in this sector, like in other sectors there is also a small dishonest minority and that minority can cause serious damage.
Pension sector at risk
The pensions sector remains at critical risk to fraud, given the scale, sum and diversity of investments pensions schemes are responsible for, combined with counter fraud and cybercrime processes, which are not yet fully adapted to very rapidly evolving threats.
Pensioners and prospective pension beneficiaries – who tend to have low levels of engagement with their retirement savings and finances – are also seen by fraudsters as easy targets, particularly if documents can be easily purchased, corrupted or faked.
Fraud that targets future pensioners can range from the obvious, such as fraudulent activity related to pensions liberation reforms, through to fraud and error arising from bad or negligent administrative actors, inappropriate investments, and targeting of schemes by external fraudsters.
Some of the chief risks to the pensions sector are internal fraud, identity fraud and cybercrime.
Internal fraud
The large sums of money pension funds hold are particularly attractive targets for fraudsters and there is evidence of corrupt insiders investing in inappropriate funds and organised fraudsters targeting staff running pensions funds.
A minority of corrupt (or incompetent) staff can open the door to fraudsters and enable cyber-attacks, the unlawful disclosure of information to third parties, the manipulation or falsification of documents to enable unqualified individuals to receive a pension or the diversion of payments from legitimate pensioners.
Identity fraud
Pension schemes can be at risk to identity fraud, where imposters impersonate the real pension holders to claim their benefits.
Identity fraud has been increasing in prevalence, driven by advances in technology and the rise of the Dark Web enabling fraudsters to openly sell stolen or fake personal information online.
Pension schemes and their administrators need to invest proportionately in controls to detect false or stolen documentation or they will remain at risk.
Cybercrime
The data that pension scheme administrators hold is particularly valuable to fraudsters and the use of digital technologies to administer pension schemes creates new vulnerabilities.
For example, impersonation of legitimate beneficiaries to divert payments, the hacking of systems to alter records for the purpose of fraud or to secure the personal information of pension holders.
While all organisations are vulnerable to cybercrime, the pensions sector appears to be lagging behind. Crowe’s 2019 ‘Pensions Risk Management Report’ found that 25% of schemes surveyed did not have plans in place to respond to cybercrime and only 33% of schemes had received cybercrime scenario-based training.
Jim Gee, Partner and Head of Counter Fraud at Crowe, comments: “Fraud is a pernicious problem with clear economic effects: private companies are less financially healthy, public service quality is reduced, individuals suffer and charities are deprived of valuable resources. Fraud has a serious and detrimental impact on the quality of life across every sector and region of the country.
In respect of pensions, fraud undermines the value of income for people at a crucial time of life when sources of income are more limited and the chances of financial recovery are reduced.
It is time for the industry to review whether it is doing enough. Think of the extensive protection the banking sector places around comparatively small sums held in current accounts versus the less extensive protection around much larger sums in pension pots. This simply does not add up.
There are gaps in the resilience of pension schemes and their administrators to fraud and cybercrime. The sector must come together to drive up standards of awareness and preparedness.
A pension, in many ways, represents a life’s work. The industry must better protect the fruits of peoples’ labour, rather than funding early retirement for undeserving fraudsters.”
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