The UK government (jointly between HM Treasury and the DWP) put together a consultation on pensions scams back in December 2016, and the deadline for all responses was midnight of 13 February 2017.
This consultation has come about from an increase in pension scam activity, in particular, unscrupulous firms’ attempts to convince individuals to transfer their entire pension pot to another scheme through the use of cold calling. These firms have used high pressure sales tactics, attempting to discredit the individual’s existing arrangement and making promises of high returns on inappropriate investments. They have, however, failed to inform individuals of the potentially extortionate tax consequences of such transfers (in many cases an unauthorised payment tax charge of up to 55 percent!) or give an honest depiction of the actual transfer.
The aim of the consultation was to address three main areas of pensions scams that have become more apparent in recent years:
1. Cold calling – a ban on all cold calling.
2. Pension scheme members’ right to transfer – limiting members’ statutory rights to transfer to another scheme.
3. Making it harder to open fraudulent schemes – single-member occupational pension schemes/ to only allow active companies to register a pension scheme.
Banning cold calling
The consultation has focused on cold calling as the main problem and it was noted that in 2013, 97 percent of pension liberation cases brought to the Citizen’s Advice Bureau involved pensions scams which came about from cold calling.
Although at present the FCA, ICO and Ofcom have powers to regulate cold calls, they do not have the power to introduce a full ban on cold calling. The proposed ban will be a ban on all cold calls in relation to pensions and will be enforced through primary legislation. This will send a clear message to individuals that no legitimate firm will ever cold call them in relation to their pension arrangements. It will further send a message to these firms that it is illegal to cold call.
Limiting members’ statutory right to transfer
At present, trustees of schemes have little right to refuse a member’s wish to transfer their pension pot to a new arrangement. This may be problematic in many instances, as the individual may decide to transfer to a scheme which appears to be a scam yet the trustees of the scheme has little power to stop this transfer.
The government is now proposing to restrict members’ rights to transfer in certain circumstances, which should reduce situations as described above. The consultation proposes that a statutory right to transfer will only be allowed where: (i) the receiving scheme satisfies being a personal pension scheme which is authorised by the FCA; (ii) a genuine employment link to the receiving occupational pension scheme can be demonstrated, with evidence of regular earnings from that employment and confirmation that the employer has agreed to participate in the receiving scheme; or (iii) the receiving occupational pension scheme is an authorised master trust.
The government has recognised that this proposal comes with implementation challenges and that this needs to be carefully balanced with ensuring that trustees are not refusing transfers to simply retain pension pots, to the benefit of the scheme and to the detriment of members.
Making it harder to open fraudulent schemes
There are many single-member registered occupational pension schemes in the UK, registered by dormant companies. To the public’s mind, the fact that they are registered may signify that they are entirely safe to invest in, that the investments are appropriate and that the scheme could not be a scam. In reality, some of these single-member schemes are scams that make false promises to individuals about certain returns in investments and include charging extortionate fees, often as high as 20 percent. In addition, due to many of these scams involving unregulated overseas investments, it has at times led to tax charges of up to 55 percent of the individual’s pension pot. The government has, therefore, proposed to look into making it more difficult for schemes to be opened with the purpose of scamming individuals. One of the changes it proposes is to only allow for active companies to register for an occupational pension scheme.
Comment
The issues outlined in the consultation have been apparent for the last few years, and cold calling has been one of the main sources for people being scammed. The changes proposed in the consultation are positive, though, some would agree that the government has been slow in its response to the problem.
Enforcing the illegality of cold calling under primary legislation is theoretically a great idea to reduce dishonest firms from scamming individuals; though, this needs to be accompanied with an increase in publicity and advertisement explaining to the public that no pensions provider, under any circumstance, can legally cold call anyone to sell them their pension arrangement. The banning of cold calling will not stop scammers from trying their luck, though providing full awareness to the public could make all the difference from an individual losing their entire life savings without recourse, to enjoying one’s deserved pension pot at age 55 or retirement.