What role do employers play in protecting staff from pension scams?

Need to know:

  • Pension scheme trustees will soon have a new obligation to assess transfers for fraud.
  • If a red flag has been identified, the transfer can be stopped.
  • Every transferring member must receive Pension Wise guidance, or actively opt out.
  • Employers can do much to educate employees using websites such as ScamSmart.

Pension schemes face tough due diligence on member transfer requests, and will soon be able to block suspicious transfers under a warning flag system. The new regulations, which stem from the Department for Work and Pensions (DWP)’s consultation on how to prevent pension scams, are expected in the autumn.

In recent years, many trustees have found themselves in a position where they have suspected a pension scam but been powerless to prevent a transfer going ahead. Trustees will now have the power to determine whether a transfer raises ‘red flags’ or ‘amber flags’. If a red flag has been identified, the transfer can be stopped, and if an amber flag is raised, then trustees can require employees to take guidance before any cash is transferred.

Red flags will arise where unregulated financial advice has been provided; or the member has been contacted out of the blue, offered incentives or pressured to complete quickly. Trustees will also have powers to request information to assess the circumstances around the transfer, with an automatic red flag where a member fails to provide information requested.

Amber flags would arise if the receiving scheme offers high risk, unregulated or unorthodox investments; high or obscure fees; involves overseas advisers or investments; or where there has been a high volume of transfers linked to a single scheme or adviser. If any of these apply, the transfer cannot proceed unless the member accepts guidance from the Money and Pensions Service (Maps), unless they have already done so in the past year.

Nigel Peaple, director of policy and research at Pensions and Lifetime Savings Association (PLSA), says: “The prevention of scams is a priority for pensions minister Guy Opperman, so there is some impetus around this. As well as new rules requiring members whose transfers raise amber flags to take guidance from Money Helper, which was launched by Maps in June, the DWP has outlined plans to help every saver looking to access their pot become more informed before moving their money.

“New ‘stronger nudge’ rules propose trustees and scheme managers ensure the individual has either received, or opted out of receiving, Pension Wise guidance, before proceeding with their application. Schemes must also offer to book a Pension Wise appointment on the individual’s behalf.”

Despite the detail in the draft regulations, trustees will have to make judgment calls and the checking process will inevitably incur additional costs and delays. Often members are ‘insistent’, either because they desperately need cash or because they have had their heads turned by investment promises that are too good to be true, exacerbating the challenge. Furthermore, if trustees allow a transfer without making the necessary checks, a complaint could be considered by the Pensions Ombudsman.

Pensions education

Employers can play a central role in providing members with financial education. “We are seeing sponsors respond by improving the communication and education on offer to scheme members,” says Steve Etherington, employee benefits and workplace pension advisor at PWC. “This is often supplemented by videos, webinars, pre-retirement seminars, one on one sessions and access to financial advice from advisers that have been specifically procured for the members to use. Trustees, where such advisers are appointed, are putting in place ongoing governance arrangements to monitor the adviser’s delivery, including gathering feedback from members on their experience.”

Communications should regularly signpost members to ScamSmart, which was launched by the Financial Conduct Authority (FCA) to help people spot pension fraud. The FCA website also publishes a warning list of disreputable transfer firms.

Pension scams have become increasingly prevalent and problematic during the pandemic, with the FCA opening 24% more pension scam cases in 2020 compared to 2019, and the total number likely to be even higher due to underreporting,” says Lauren Wilkinson, senior policy researcher, Pensions Policy Institute. “Action Fraud data [published in July 2021] also shows that the average loss for the first half of 2021 was around £50,000, compared to around £24,000 in 2020.”

It is also helpful to explain to employees that financial advice is a personalised recommendation provided by regulated individuals, while guidance is general information. This poorly understood difference is often exploited by scammers. For example, scammers often impersonate legitimate businesses or claim a fictitious relationship to one. Dozens of fake pension advisers are using the Aviva name to defraud retirement age customers, the insurance firm has said.

“The Pensions Regulator has asked trustees to pledge to do what they can to protect members,” says Jonathan Watts-Lay, director, Wealth at Work. “This includes regular scam warnings, encouraging members considering cash drawdown to access guidance services, to carrying out checks and provide warnings on high-risk transfers.

“Also, the Pension Scams Industry Group (PSIG) has updated its Code of Good Practice. It recommends that when concerns of pension scams have been identified, trustees should consider telephoning members before any transfer payments go ahead. In addition, all transfers of concern should now be reported, not only those that are refused.”

The PSIG’s three core principles remain the same including: raising awareness of pension scams; having robust processes for assessing whether a scheme may be operating as part of a scam; and being aware of current scam strategies.