 By Margaret Snowdon OBE, Director, JLT Employee Benefits
Pension liberation is not illegal, but it is sometimes part of a scam to cheat scheme members out of their benefits. It can be highly damaging to individuals, pension schemes and society generally and all of those involved in managing and advising pension schemes can help protect against it. Accessing pension scheme assets early, typically before age 55, is legal, provided the relevant tax penalties are paid, and this is where the problem begins. Pension liberation is not just about taking cash early – it is really about getting access to all of a member’s funds, and in the worse cases, stealing them.
Some companies offer a misleading way for individuals to "unlock" cash from their pension, typically before age 55, through a "loophole" or by giving them a loan, typically initiated through a cold call or text message. When times are tough, people are tempted by deals like this, but many of those who take up offers find their benefits transferred to risky unregulated investment structures, often based overseas. Huge fees may be deducted from the funds, leaving individuals with significantly reduced benefits for their retirement. Pension liberation scams threaten to undermine confidence in retirement saving. They must be stopped.
The Pensions Regulator's scorpion campaign is aimed at alerting individuals to the risk of liberation scams and, alongside the recent HMRC improvements in the scheme registration process, it has helped to reduce some of the dodgy deals. This could be a sign of success or represent a shift in the tactics of the scammers. I suspect the latter.
The pay or delay dilemma
Pension liberation presents a real dilemma for trustees and pension providers and consequently for the whole of the industry. The member has a statutory right to transfer, but it is the trustees or pension scheme provider which are required to ensure that the receiving scheme is a legitimate one. If the transfer is not to a legitimate arrangement, the trustee or provider is likely to be found to be at fault for letting a fraudulent transaction proceed. The other side of the coin is that, if the transfer is not made, the trustee or provider could be found guilty of maladministration and open to liability for delaying a payment unnecessarily.
The one that got away
Members will claim for losses against those who are reachable, generally the trustees, administrators or providers. This is not a good place to be. A key area for actuaries in future will be advising trustees and providers on how to deal with members or policyholders who have lost out through no fault of their own, as well as those who colluded to transfer benefits by the lure of access to cash. There will be enormous pressure on schemes to reinstate members back to where they were and, in many cases, the money to do so will simply have vanished. Trustees and providers may be expected to do the decent thing, but what is the right thing? Should government make up the shortfall or will schemes be expected to absorb the liabilities? Work will need to be done to identify those costs and to recover assets where possible.
The scale of transfers to fraudulent arrangements is not known. Record levels were reached in 2013, with £420 million being officially recognised as having transferred. This will be the tip of the iceberg and many of the losses will not be known for some time.
Conflicting advice
Trustees receive conflicting and confusing advice on how to deal with potential pension liberation cases. Different administrators have developed different processes to carry out due diligence. This inconsistency is expensive, but also may inadvertently help liberators. A joined up message from all advisers is essential.
The Pensions Administration Standards Association (PASA) is developing a Code of Practice, written by an industry group made up of the key stakeholders, including trustees, administrators, legal advisers, insurers and regulators. The draft Code will be reviewed by a wide group of other industry bodies to ensure broad acceptance and help ensure widespread adoption. The Pensions Minister has referred to the Industry Group in a letter to the industry, which illustrates the support for this initiative.
What will the Code cover?
The Code will be voluntary and will set the standard for dealing with requests by pension scheme members wishing to transfer funds from a UK registered workplace pension scheme to another registered pension scheme. The Code will cover:
• Standard Information to be required by the transferring scheme to allow a transfer with reasonable assurance of validity of the receiving scheme
• Appropriate discharge forms to be signed by the members
• Particular requirements when dealing with transfers to SIPP, SSAS and QROPS
• Steps for reporting suspect cases and for dealing with insistent customers
• Helping trustees identify the “red flags” which may indicate the need for greater scrutiny
• Good practice in relation to transfers
• Recommendations for legislative or regulatory change
A key objective of the code is to obtain a view from the Pensions Ombudsman that he will take into account compliance with the Code in determining specific complaints about pension transfers. This would help to restore fair play in this difficult area.
Poor practice
Finally, one could argue that poor practices or a tolerance for poor practice is at the heart of liberation scams. With good governance on both ends of pension transfers, there would be no place for disreputable players. With a requirement for fit and proper trustees and administrators for all schemes, there would be a check on illegal practices, so I would encourage the introduction of, say, regulated administrators for all schemes, including SSAS’s. Actuaries also have a key role to play in helping to improve the standard of governance in schemes that receive transfers as they are in a good place to spot poor practice.
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