Pension scams remain a significant threat to savers with new channels of contact and types of scam evolving.
Transfers during the Coronavirus
The Coronavirus pandemic could make members more vulnerable to scams.
The Regulator, Financial Conduct Authority (FCA) and the Money and Pensions Service (MaPS) say fears over the impact of the pandemic on markets and personal finances may make savers more vulnerable to scams or making a decision that could damage their long-term interests.
The Regulator has asked trustees to urge their scheme members looking to transfer to exercise caution and to visit the ScamSmart website to learn how to protect themselves from pensions scams.
To reinforce this message, the Regulator, the FCA and MaPS have jointly issued a letter addressed to members of defined benefit pension schemes who are considering transferring out. The letter contains important information on the points that the reader should consider before making a decision, where to go for impartial guidance and asks them to take extra care at this uncertain time. Guidance from the Regulator states that a copy of the letter must be issued to all members who have defined benefits and request a transfer quotation.
The Pensions Policy Institute (PPI) has published Briefing Note 121 which explores how scams have evolved since the introduction of pension freedoms in 2015.
Initially the main concern was over pension liberation which saw savers transferring their benefits to a scheme promising them access to cash often before the tax rules allow (i.e. usually age 55). For many savers this resulted in unexpected tax charges from HMRC but in addition many lost all, or nearly all, of their money as the savings were effectively siphoned off by scammers. The PPI report finds that this trend shifted following the introduction of pension flexibilities to a much stronger focus on investment scams.
These types of scam can involve inappropriately high risk investments, investment opportunities that don’t exist, a real investment opportunity but one where rather than investing in it the scammer takes the individual’s money themselves, or a product where there may be high charges or hidden costs associated with the investments.
DB transfers have also increased since the introduction of pension flexibilities as members see the potential to access large lump sums following the transfer to a DC arrangement such as a personal pension. This flexibility, coupled with perceived high transfer values, potentially puts more savers at risk from scammers despite the requirement for independent financial advice in many cases.
In the briefing note the PPI argues that the data surrounding pension scams does not offer a comprehensive view of the true scale of the issue. This is particularly down to the belief that only a minority of pension scams are actually reported, and for those that are, the data is not collected in a comparable way across the industry.
Although regulatory action has been taken to try and combat scams new approaches have developed. Since the cold calling ban was introduced in 2019 scammers have sought new ways of targeting victims, with increasing numbers being targeted online. The FCA reported that 54% of those who had checked the FCA warning list in 2018 had been contacted by potential scammers via online sources, up from 45% in 2017.
Evidence from across the industry has found that many savers are not aware of the warning signs of a scam. In 2016, Citizens Advice carried out an experiment in which participants were shown mock pension adverts. 88% of participants selected a pension access offer containing pension scam warnings signs. Regulators and the industry are working together to highlight the steps that savers should take to protect themselves against scams.
Scam Man & Robbin' is a new retro online game that aims to educate consumers about pension scams.
The launch of Scam Man & Robbin’ follows a Hackathon, hosted by PensionBee in November 2019, which challenged teams to create an online concept that raises awareness of pension scams in both an engaging and educational way. In the game, the player takes on the role of ‘Scam Man’, a vigilante whose main objective is to protect people’s pensions from scams.
The game challenges some common misconceptions which may initially seem positive about a pension scheme but may in fact be the hallmarks of a scam.
In March, Action Fraud announced that coronavirus-related fraud reports had increased by 400%. To help highlight the new risks that face pension savers of all ages, a coronavirus-specific scam has been included within Scam Man & Robbin’.
Other scams featured in the game include cold calls, early pension release and pressure to make an immediate decision.
The FCA has announced that it will implement a ban on contingent charging for defined benefit (DB) transfers.
In July 2019 the FCA announced a consultation on their proposals to ban contingent changing; where financial advisers only get paid if a pension transfer proceeds. Following the consultation process the ban has been agreed and will come force with effect from 1 October 2020. The FCA have issued a policy statement (PS20/06) which summaries the feedback they received to the consultation and sets out the final rules and guidance on the new measures.
Responses to the 2019 consultation (CP19/25) highlighted that whilst some argue contingent charging enables everyone to gain access to free pension advice, others are concerned that advisers may recommend a transfer in order to receive payment rather than it being in the consumers best interest.
The FCA views the proportion of consumers who have been advised to transfer out of DB schemes too high when compared to the advantages these types of scheme offer, and their reviews show too many instances where the transfers were not in the consumers’ best interests.
The ban is intended to address ongoing conflicts and reduce the numbers of those who proceed with unsuitable transfers. The new rules will require advisers to consider an available workplace pension as a receiving scheme and if an alternative is recommended, to demonstrate why the alternative would be more suitable.
Abridged advice also will be introduced which will enable consumers access to initial advice at an affordable cost. The abridged advice can only result in a recommendation not to transfer or a statement that it is unclear whether a consumer would benefit from a transfer without giving full advice.
Once the new rules are implemented, firms will need to set a total charge for their activities.
There will be exceptions applied in prescribed circumstances, such as ill-health or for those experiencing severe financial difficulty. Those who have agreed to contingent charges and started work before that date may charge contingently, provided that a personal recommendation is given before 1 January 2021.
There is little doubt that financial hardship, especially in these difficult times, will make pension savers prone to making decisions in the short term that may, or may not, go against professional financial advice.
Identifying and publishing trends help those running a pension scheme to shape their due diligence processes when reviewing the proposed receiving scheme following a transfer request. However, this is an imprecise science as clearly it is not usually possible to know what will then follow.
There is clearly no easy fix and therefore the measures being gradually introduced such as the cold calling ban and now the ban on contingent charging should be seen as continued steps in the right direction. At the same time, the regulators and other industry groups are rightly continuing to urge trustees to engage with members by alerting them to the danger of pension scams.
However, despite these positive moves there still remains large pressures on the transferring scheme to manage the conflict between carrying out the required due diligence on the proposed receiving scheme and processing the transfer request in a timely fashion.
It is important for pension providers to have effective procedures in place to not only protect scheme members but to give themselves confidence that if challenged on why a transfer went ahead that they have done all they can.
Please speak to your usual Capita contact if you would like further information on Capita’s processes.