How can employers protect staff from falling prey to pension scams?

pension scams

Need to know:

  • Employers are ideally placed to help increase financial literacy around pension scams.
  • Engaging employees and becoming a trusted source of information will empower staff to recognise fraudsters.
  • All communication channels need to be used to regularly alert employees about what to look for.

Since the introduction of pension freedoms in 2015, scams centring around pension transfers have become an increasingly common occurrence, predicted to have led to a possible £10 billion in losses.

As such, protecting individuals from pension scams is high on the public agenda, with the government planning to ban pensions cold-calling and unsolicited texts and emails later this year. It also intends to introduce a requirement that anyone who wants to access their pension pot will have to receive or expressly refuse guidance before they do so.

Additionally, a new publicly-funded debt, pensions and money guidance body will replace three existing statutory bodies: the Money Advice Service, the Pensions Advisory Service and Pension Wise.

These changes aim to tackle some of the most common routes fraudsters use to prey on pension members, but in a world where scammers are fast to adapt and legislation slow to follow, employers should step in to fill the gaps in their employees’ protection.

Increasing financial literacy

Fraudsters prey on low levels of financial literacy, says Dale Critchley, technical reform manager at Aviva.

“Providing financial education is key,” he continues. “[Employees] need to know that if an investment sounds too good to be true, then it is. Employees need to understand what a regulated product is and whether a financial adviser is regulated. Get them to know what the different types of investments are. If [employers] raise financial literacy, people are better able to protect themselves.”

Oliver Topping, associate at Sackers, agrees: “Awareness can help employees resist an approach from a person, or a cold call, and help them realise a transfer isn’t in their best interest.”

Becoming a trusted employer

Individuals are more likely to listen to their employer than the pension provider, which can be seen as having a vested interest.

“We may say something about the transfer isn’t right, but the customer thinks we’re saying that out of self-interest,” Critchley explains. “The employer is seen as the honest broker; there is nothing in it for them, therefore it’s more of a trusted message.”

Employers could even employ their own Financial Conduct Authority (FCA)-registered financial adviser to help employees make good decisions.

Karen Bolan, head of engagement for pensions at AHC, adds: “The scammer will portray themselves as the champion of the employee, while the employer is ‘keeping’ all [their] money, so it’s important the employer makes sure they’re the trusted source by putting out factual information as often as possible. Don’t just use the pensions channel, use the corporate and HR channels to talk about the issues.

“Employers can be fearful about talking about pensions, but they shouldn’t be afraid; they need to be the protector.”

It is far more difficult to stop a scam than prevent it, warns Michelle Cracknell, chief executive, The Pensions Advisory Service (TPAS). “The member will have been lured by big numbers, seemingly exciting investments or access to more money. We’d encourage employers to raise awareness of scams by sharing some of the horror stories, and suggest that the members are given a secondary warning when they make a transfer request.”

Out of the ordinary investments

There is plenty of information available for employers via the FCA, Pension Wise, Pensions Advisory Service and The Pensions Regulator, all highlighting the types of investments employees might be susceptible to.

Many pension scams involve odd-sounding investments like bamboo, truffle trees, graphite, forests, carbon credits, car park spaces, storage pods, student accommodation, as well as holiday homes in countries like Cape Verde.

Surprisingly, many of those tempted by more esoteric opportunities are relatively experienced investors. “They may have some experience, and therefore are more open to diversifying,” says Critchley.

Recognising tricks of the trade

Employees need to beware of fraudsters ‘cloning’ trusted companies, says Kate Smith, head of pensions at Aegon. “They may use names very similar to reputable pension companies or financial advisers, perhaps missing a letter, with smart websites and glossy brochures.”

Some of these websites even carry anti-scam messages, trying to trick consumers into thinking they are legitimate, as well as using the names of FCA-registered financial advisers, or claiming to be FCA-registered.

Pension scams have two elements, explains Smith. The first is using pension freedoms to cash in pensions and transfer them to a suspicious fund. The second sees fraudsters convincing individuals to liberate funds before they are 55, which is not strictly legal.

“What’s confusing for people is that the scammers will transfer them into another pension. The trouble is that scammers took advantage of a legal loophole, setting themselves up as pension providers,” says Smith. “Scammers will call the liberation a loan, though HMRC does not care what it’s called and the victim may end up with a double whammy of being scammed and facing a 55% tax bill.”

Scammers will try to ingratiate themselves through offers of free pension reviews and claims about legal loopholes, and some may even approach the employee in person or via ‘introducers’, who might be workmates or social acquaintances.

Timing is everything

There are also certain times when scammers are more likely to strike. “It’s almost like they can smell blood in the water,” says Critchley. “For example, when there’s a merger or redundancies.”

“It’s very easy with social media to trace current and former employees who can then be approached about transferring their pension, when they’re vulnerable because of their uncertainty about the sponsoring employer,” Cracknell adds.

This is precisely the right time for employers to communicate and engage employees and signpost them to TPAS for impartial help.

Overseas vulnerability

One demographic which is often overlooked by employers is overseas staff, who are particularly vulnerable to scammers, says Jonathon Webb, pensions consultant at Montfort Consult.

“They may have lost touch with the employer and been excluded from any advice, then there are certain tax advantages to transferring pensions to overseas investments, and unscrupulous advisers take advantage,” he explains.

Scammers abroad will target certain industries, like airlines, and go to great lengths to get hold of people’s details, because of the high sums of money involved. “We came across one case where they were bribing the local dry cleaners to get mobile numbers,” notes Webb.

Some countries, like the Philippines and the Middle East, are famous for pension scams, which is almost akin to organised crime, says Webb. He believes the solution lies in all stakeholders ensuring employees do not make poor decisions. “Prevention is always better than cure,” adds Webb.

The future

Experts say they will greet any new legislation, if and when it is introduced, with cautious optimism. As MP Frank Field has highlighted, it does not currently look set to ban face-to-face persuasion, or ‘factory gating’, as it was known at Tata Steel, when employees were approached outside the workplace or by introducers.

Although authorities are tightening their grip, fraudsters will always look for new ways to scam people. Already, there is a growing trend of scammers basing themselves offshore. “They’re not covered by UK law, so they can ring you and email you as much as they like,” says Smith.