Pension scams:

Everything changed that night at the New York Hippodrome on January 7 1918.

The time and place marked the moment when magician Harry Houdini made a full-size, living elephant disappear in front of a packed audience. The spectators were spellbound.

New York papers ran with the story for days: society speculated and journalists attempted to ferret out the secret to making such a large creature 'disappear into thin air'.

Houdini never revealed his secrets, although we know the elephant must have always still been there on stage, concealed by artistry and showmanship.

But there is a world of difference between an artist making things seem as if they have disappeared, and a con artist actually disappearing with your money.

And the tale of the Disappearing Pension is a much bigger one than even that of the mysterious Mr Houdini: it is one that affects hundreds of thousands of Britons, and instead of ending in awe, it ends in tears for too many households.

In fact, the figures relating to people's vanishing pensions are stark:

• £30.85m of people's hard-earned pension savings have been lost in the three years from 2017 to 2020, according to TPR and FCA analysis of reports made to Action Fraud. 
• In 2015 the Project Bloom initiative was set up to tackle pensions fraud. At the time, an estimated £1bn had been whisked away by pension scams, according to agency PensionWise.
• By 2019, Project Bloom found some victims of pension scams have lost more than £1m each in savings to fraudsters. 
• More than 5m pension savers were said to be at risk of falling for the tactics used by scammers in 2019, according to the FCA, but it warned that since the Covid-19 pandemic, scam activity increased. 
• Aviva reported that in the three months from March to July 2020, pension scams made up 16 per cent of all suspicious reported activity.

It is clear despite the efforts of regulators since 2015, the problem is not getting easier to manage: Covid-19 has exposed people's vulnerabilities and susceptibility to falling prey to telephone and internet-based scams.

The latest FCA consumer investments data review 2020, published on January 18, has called the effects of pension scams “devastating” for consumers.

The report said: “When a consumer falls victim to a pension scam or money from their pension ends up in investments that are not appropriate for them, their losses can be devastating. 

“We have a specialist supervision team that focuses on cases where we suspect potential pensions harms. 

“This includes scams involving pension liberation and pension transfers or where we suspect unsuitable advice has led to a consumer ending up in investments that are clearly not suitable for them.”

The figures keep rising. Among the 1,542 scam cases investigated in 2020, 135 were opened by the FCA's specialist pensions team in 2020.

This was a 24 per cent increase on the number of cases opened in the whole of 2019 (109). 

These cases have already resulted in 10 companies varying their permissions so they can no longer undertake the activities that caused consumers harm.

A further two cases have been referred to enforcement.

These headline figures peak to the depth and breadth of the problem: people's pensions are at risk.

Neil MacGillivray, head of technical support at James Hay, comments: "Some scams are obviously phoney but many are not, and their cleverness puts them several steps ahead."

However, no sooner has one fraud been stopped than another rears its ugly head.

As Mr MacGillivray says: "By the time the regulator is knocking down one scam, the fraudsters have moved on and opened three more."

What can be done?

Ros Altmann, former pensions minister and independent pensions consultant, says better, official guidance is a starting point: "Firstly, auto-enrol people into PensionWise before they move money out of a pension fund."

To this end, Labour MP Stephen Timms, chairman of the Work and Pensions Committee, brought an amendment to the pensions schemes bill in 2020 that would have made an appointment with PensionWise automatic. 

However, this amendment was overturned in the bill's passage through Parliament.

According to Mr Timms: "The government set up PensionWise alongside the pension freedoms. A key part of the pension freedoms legislation was this guidance guarantee.

"PensionWise is the implementation of that promise. We argued – and I feel strongly about this – that PensionWise needs to be much more widely taken up than it is now."

Mr Timms says he will not stop in his quest to make sure people are given the best possible guidance.

"The default should be a PensionWise appointment," he adds.

There also needs to be better reporting and monitoring. In 2020, the Police Foundation produced a report calling for a database to be set up for the different agencies to draw on and share information about scammers and scams.

Lady Altmann would like to see an industry-led "early warning register where pension providers or advisers, or the public, can report potential scams" and this information could be confidentially sent to all pension providers.

Reporting can take the oxygen out of scammers, and this is something that Mike Morrow, wealth and platforms director for national adviser Openwork, strongly advocates.

He says: "While scams can be reported to the FCA or TPR, advisers have in the past complained that action to investigate these can take too long and consumer detriment results of the ensuing delay.

"A 'potential problem' list that goes to providers could help raise important red flags, while allowing providers and advisers to make the necessary due diligence checks before giving a transfer the green light."

If guidance and 'red flag' lists are not enough, should there be higher restrictions on transfers?

Lady Altmann thinks so: "If a pension provider never transferred funds out, there would not be any scams.

"If we want transfers to occur, we have to help people avoid the rogue schemes."

Clearly, one cannot stop all transfers; to do so would be against the spirit of pension freedoms and would be to the detriment of many clients for whom a transfer would lead to the best financial outcome.

That said, the regulator is concerned that too many transfers have been going ahead, not because it is best for the client but because an uncertain economic environment and persistently high transfer values have combined to make that transfer too tempting a prospect.

The chart opposite shows just how high transfer values are, compared with values for not transferring.

The latest FCA findings on defined benefit transfers, from its market data research carried out between October 2018 to March 2020, showed 49,456 clients were given a recommendation to transfer. This made up 57 per cent of all transfers. 

Worryingly, of the 49,456 clients advised to transfer, only 500 (1 per cent) were transferred to a workplace pension scheme between October 2018 and March 2020. 

Where did the rest of the money go? Overseas? To potentially higher-risk investments within self-invested personal pensions? As the FCA itself stated, this was a concern, given the tax breaks and employer contributions that make up a workplace pension.

The FCA report stated: “We expect all firms providing DB transfer advice to have appropriate professional indemnity insurance cover in place, in line with our rules. If they don’t, they must not carry out DB transfer advice.”

Yet the FCA found 119 companies (9 per cent of those advising on DB transfers during that period) did not have PII cover.

More needs to be done to curb these worrying practices – and it seems enforcement will only occur if and when something comes to light that proves the advice was wrong.

Lady Altmann called this “shocking”, and urged the regulators to do more. She said: “I do hope the regulators will move towards a more proactive approach to protecting consumers, rather than the current tendency to be only reactive. 

“Acting long after thousands of people have been put at risk is not in the public's interest.”

It must be stated not every recommendation to transfer is a scam, but this has been widely noted, from government level down to advice company level, as a significant weak link in the chain, and a route via which thousands of people have lost nearly every penny saved in their pension pots. 

And it is not always a direct action of the adviser that is censured – often an adviser is reprimanded for the sin of omission, that is, not doing what it should to stop a raid on a client’s pension by a third party.

For example, FTAdviser recently wrote on the ruling from the Financial Ombudsman Service, which ordered advice company Charterhouse Independent Financial Advisers to compensate a client after their pension pot was raided by "malign" fraudulent activity.

The Fos found that Charterhouse was responsible for failing to stop a fraudulent withdrawal from their client’s Sipp in 2018.

As a result, ombudsman Kevin Williamson ordered the company to reimburse the client’s pension by nearly £8,000, to cover any missed investment returns and to pay £250 for the trouble and upset caused.

Government in action

The government and regulators are not being idle, though thousands of victims may feel this is the case.

The government is seeking to act on scams and the ease by which fraudsters can raid pension pots of consumers, whether they are advised or not. 

It also passed the pension schemes bill on January 19, giving greater protections to workplace pensions and providing consumers with better technology to enable them to keep an eye on their pots.

The bill contains, among others, measures to: 

• Better protect member benefits in workplace schemes.
• Provide a framework for a future pensions dashboard.
• Prevent material detriment to pension schemes.

This soon-to-be act will help protect members of workplace pensions, but what happens when the member comes to retire?

How can you protect them from some scammer's sleight of hand? What's to stop members placing their pots with some clone company or similar white-collar fraudster?

Information and education are key, the WPC has claimed. But while Mr Timms’ amendment for an automatic PensionWise appointment did not make it into the bill this time, he will not give up pushing for a more informed consumer.

Moreover, he is adamant the industry, led by government, must have a more joined-up approach.

He says: "We have this situation where there is a curious fragmentation of various bodies. We have Action Fraud, the FCA, TPR, the Pensions Ombudsman, the Fos, the police – everything is so fragmented.

"And therefore people aren't quite sure who to report to, so co-ordinating the enforcement and policing resources around this is one of the things that has to happen."

He states the WPC will continue to do more to make sure the industry plays its part, too.

"Our inquiry is still under way and we haven't yet formulated our recommendations but I am concerned this fragmentation of the policing response is one of the things we need to tackle."

Mr Timms stresses the point that a co-ordinated approach is the best way to tackle scams, and says this should be led by the government.

"We have got to gear up to respond effectively to [scams]. There is a lot the government needs to do."

Andrew Tully, technical director at Canada Life, comments: “I welcome the WPC’s continued interest to co-operate with the industry and tackle the problem.

“Pension fraud is an urgent and potentially devastating crime for its victims and the problem is not going to go away on its own.”