Pension scams: five red flags to look out for

In January 2015, the Pensions Ombudsman issued several decisions that clarified the legal tests around whether a pension scheme is a genuine occupational scheme. However, if the scheme fails to meet those tests, it may then come down to the Scheme Administrator’s discretion (depending on the scheme rules) as to whether the transfer proceeds.

It is, therefore, important for the Scheme Administrator to carry out due diligence on the parties involved in the transfer in order to protect the interests of the customer, especially if they are in the process of becoming the unwitting victim of a transfer scam.

One trend our due diligence process has highlighted this year is a significant increase in the prevalence of pension scammers attempting to use Small Self-Administered Schemes (SSASs) to dupe people into losing their pension savings.

In a typical scam scenario of this kind, pension funds are transferred from a legitimate scheme to a fraudulent SSAS. A proportion of the funds are then paid direct to the pension investor in the form of ‘cash back’ or a ‘non-repayable loan’. HMRC could view either of these as Unauthorised Payments, meaning the individual ends up with hefty tax charges, often inadvertently.

The scammer then promises to invest the remainder of the funds in a non-mainstream investment with the lure of high guaranteed returns. Twelve months later when the person tries to see how their funds are doing, all lines are disconnected, post is returned and emails bounce back. The scammers have disappeared, along with the individual’s pension funds.

The number of requests for transfers to SSASs that raised a red flag in our due diligence process during 2015 was 140% higher than during 2014. It is hard to know if there is a direct link between transfer scams and pension freedoms, but certainly the latter has made pensions front page news, alerting more scammers to the potential prizes on offer.

To protect customers, we have five red flags that we look out for that relate to each party in the transfer process.

  1. The SSAS being transferred to
    The use of SSASs for pension scams is fairly recent, so if a scheme has been established and registered with HMRC within the last six to twelve months it’s worth scrutinising. You can verify the date of establishment from the trust deed. The scheme administrator ought to be able to provide a copy of the HMRC registration letter.
  2. The investor
    Good investment opportunities don’t need to be ‘sold’. Legitimate investment opportunities don’t promise guaranteed returns. If someone has been cold-called or texted by someone offering guaranteed returns on a too-good-to-miss investment opportunity, perhaps following a free pension review, this should ring alarm bells.
  3. The alleged employer that the SSAS relates to
    Is there any evidence that the company has ever traded? When so much business is conducted online, even the smallest of operations have websites, Twitter accounts and Facebook pages. With so much information at our finger tips, the fact that you cannot find any (or limited) details for a company online is always a concern. There are also numerous due diligence websites that allow subscribers to check company details, such as directors, date of incorporation and basic accounts details. A lack of history can signal a lack of legitimacy.
  4. The scheme administrator
    Alarm bells might ring if you are looking at a pension scheme and there is a company involved as the scheme administrator, but they are not a trustee of the scheme. Being a trustee is a potentially onerous role that brings certain fiduciary responsibilities. A scammer, however, will look to avoid responsibilities. On the flip side, the presence of a professional trustee gives more comfort that the scheme is legitimate. It used to be mandatory for a SSAS to have a professional trustee and with pension scammers increasingly looking to exploit SSAS arrangements, we may see professional trustees becoming mandatory once again.
  5. The adviser
    Investors are perfectly capable of managing their own pension, as evidenced by the raft of pension providers catering to the DIY market. However, a SSAS is a more complex arrangement than a personal pension and you would expect more often than not to see an FCA registered adviser involved, certainly with transfers to and from the scheme if not with the scheme itself.

To be clear, none of these flags on its own means that the receiving scheme is suspect. But when you string them all together, it can be enough to raise doubt over the transfer.

So what more can we do? These models are always evolving, and as a provider it’s about constantly making sure our due diligence is always robust without ever being obstructive. It’s also about being alert to suspicious patterns and aware of potential risks.

Meanwhile, one flag we’re unlikely to see any time soon is a white flag from the scammers, so in the meantime it’s important that all of us in the industry pull together to protect savers’ interests as best we can.

Technical Team Leader

After completing his postgraduate studies at Lancaster University, Martin spent two years working for a leading insurance company before joining AJ Bell in April 2007. Martin worked initially on the AJ Bell Investcentre product before moving to a technical role in 2009. His main focus is providing technical support to the various teams and departments within the business. He is also involved in delivering training to staff on the rules and regulations that affect our customers.