Mark Wood argues for tighter controls around the formation of pension schemes to help prevent pension fraud

In recent weeks attention across our industry has rightly focused on the many schemes that have sprung up to enable individuals to draw cash from their pension savings. Insidiously named ‘pensions liberation’ this dubious proposition is promoted by unscrupulous enterprises, no doubt formed, not by scallywags on the make, but by villains systematically defrauding innocent individuals. There is more than a possibility that these organised criminals have been behind many other scams of a similar complexion. Text messages encouraging whiplash claims, PPI recompense, mortgage endowment compensation and fee-free personal injury litigation spring to mind. The offer of cash from your pension preys on individuals anxious to relieve pressure on family budgets. When the uncertain future value of a pension is compared to cash in hand the readies will always be more attractive.

In the cold light of day those tempted into a transaction suffer an extreme form of buyer’s remorse. Not only do they discover that they will incur a tax liability on the money they have ‘liberated’ at a penal rate of 55 per cent, they must also wait until they retire to find out if the pension scheme that has claimed to be custodian for their savings in fact exists and still has their money.

The formalities with which a new pension scheme must conform before being registered fall way short of those required of the prospective proprietors of a bank, an asset manager, or a friendly society. Indeed, registering an offshore pension scheme is less onerous than opening a bank account, let alone setting up a bank. This is despite the fact that the function that is performed is in important ways essentially the same. Easy access to an HMRC number bestows an air of permanency. The potential for deception was acknowledged by HMRC recently ‘de-registering’ 500 schemes, though there is a whisper that many of these have subsequently been re-established. Far greater formality is required.

The proof of probity for an entity that is to be entrusted with an individual’s life savings should arguably exceed that of other financial institutions. There is no compensation scheme for those who have saved into a newly formed offshore pension scheme. Individuals are transferring life savings in return for an interest in a wide variety of get-rich-quick schemes. The assets on offer are always attractively appealing. Villas in Cape Verde and Gambian Gites. Image takes precedence over risk rating. Condominiums on some exotic coast hardly comply with the moderate risk rating of the investments which would have generally been held by the donor schemes.

Industry-wide concern about the transfer values quoted for individuals transferring from defined benefit schemes to defined contribution schemes or into an enhanced annuity resulted in a code of conduct that has prescribed, for example, that no cash incentive can attach the transfer offer made by a scheme sponsor. The hurdle rates used in formulating advice are widely subject to independent scrutiny to ensure discount rates are fair to those leaving a scheme and consequently foregoing the promise of a defined benefit. Additionally the advice to the individual contemplating a transfer is regulated and rigorous. The Pensions Regulator and the Financial Conduct Authority have properly paid close attention to the approach taken by employers to offers and the outcomes of those offers for the individuals who insist on transferring despite advice and those taking advice to move – typically those who are likely to be able to secure an annuity that provides a greater income than was available from the fund.

Yet groups of individuals can set themselves up as trustees taking responsibility for an offshore fund, obtain an HMRC registration and advertise for transfers, incentivised with the promise a substantial cash withdrawal, but with no promise of an expected return, no defined benefit and no compensation if the investment evaporates before the individual. The government’s tax-free incentive to transfer cash on retirement and well organised transfer offers from corporate sponsors are both closely regulated. The government through the regulators must demand stringent proof of probity before bestowing respectability by granting HMRC registration. Industry estimates suggest approaching £1 billion has been fraudulently transferred. Enough is enough.

Written by Mark Wood, CEO, JLT Employee Benefits

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