To what degree will the government’s planned pension scams clampdown really protect savers and investors? Tom Selby takes a closer look at what we know about the proposals so far.
The announcement was carefully pre-briefed to the press and media commentators on the Friday afternoon ahead of a formal announcement on Monday morning. This is not rare and allows the Treasury to exert a certain amount of control over the message that eventually comes out.
Clearly the aim was to tell the country the government as being tough on fraud and doing all it can to protect people’s hard-earned retirement pots. But does this reflect the reality of what has been proposed? And will the changes really put a stop to scammers’ attempts to get people to part with their retirement savings?
Before we get into the guts of the proposals, it is worth briefly recapping why such a clampdown is necessary.
The pension freedoms, announced by former Chancellor George Osborne in March 2014 and introduced in April 2015, radically altered the way people could draw on their retirement savings from the age of 55. Where securing income through an annuity was previously the default option for most savers, a whole new world of choice was thrown open.
This extra flexibility created a window of opportunity for criminals to go for people’s pensions – either by claiming the new rules allow you to access your savings before age 55 or attempting to coerce savers to withdraw some or all of their pot and invest it in a dodgy investment scheme.
The government estimates the extent of pension fraud since March 2014 stands at £43m. In reality, this is just what has been reported to City of London Police – the true figure almost certainly runs into the hundreds of millions. In this environment, therefore, people clearly need extra protection.
What has been proposed?
The headline reform most people have focused on will see cold-calling in relation to pensions be banned in the UK. The government intends for the ban to cover a wide set of circumstances, including:
* Encouraging savers to release funds from an HMRC-registered pension scheme, often resulting in a tax charge that is not anticipated by the member;
* Persuading individuals to flexibly access their pension savings in order to invest in inappropriate investments;
* Encouraging individuals to transfer their pension savings in order to invest in inappropriate investments.
The ban also includes unsolicited text messages and emails – a wider scope than originally proposed – and those caught flouting the rules could face fines of up to £500,000 from the Information Commissioners Office.
Away from this headline intervention, some important technical changes will be introduced to make life harder for scammers. First, extra powers will be given to pension schemes to block suspicious transfers – specifically where there is no employment link between the member and the scheme they are transferring to.
This was deemed necessary after the High Court overruled a Pensions Ombudsman decision and said the ceding provider (Royal London) could not block a transfer to a newly-established small self-administered scheme (SSAS).
Royal London believed there was a risk the scheme would be used for pension fraud. The scheme itself was established on 30 June 2014, less than a month after the company it was linked to – Babbacombe Road 1973 Limited – had registered with Companies House. Ms Hughes, the client attempting to make the transfer, was listed as the sole employee at Babbacombe Road 1973.
Because the Court decided Ms Hughes had a right to a transfer even though she received no earnings from the sponsoring employer, there was a risk this model would be increasingly exploited by fraudsters unless the rules were tightened.
Second, policymakers want to make it harder for fraudsters to abuse the SSAS structure by preventing ‘shell’ schemes being set up where the employer is deemed ‘inactive’. These shell schemes are often used as a conduit by pension scammers.
This package of measures, once implemented, should help protect savers and ensure SSASs can continue to be used legitimately by advisers and clients.
When will the changes be introduced?
While the government has signalled its intent to introduce these changes, the question of when all of this will happen remains unanswered. The latest consultation response talks of working on the practicalities of the measures with the industry and only commits to implementing the proposals “when Parliamentary time allows”.
This could, of course, be soon but the fact the government has not set a firm date is worrying. Progress has already been slowed by Theresa May’s decision to call a snap general election, and given Brexit is draining time and resource from Westminster there is clearly a danger of further delay.
It is also worth remembering that if or when these measures are introduced, they still will not stop cold-calling altogether – never mind put an end to scam activity.
The Government has also stopped short of banning cold calls that relate to investments, creating a potential loophole scammers may look to exploit. And clearly the UK ban does not cover cold calls that originate from abroad, so determined fraudsters will continue to find ways to attack people’s pensions.
My biggest concern is this set of welcome interventions will be viewed by policymakers as the end of the fight against pension scammers, rather than the start. Pension scams will continue to morph and evolve and government must stand ready to take further tough action to protect savers.
Tom Selby is a senior analyst at AJ Bell