The financial crisis led to the country becoming a low interest rate and low inflation economy. This had an inadvertent effect on most companies with defined benefit (“DB”) pension schemes; many schemes suffered a significant worsening in their funding as a result of low interest rates, with little prospect of any change in the medium term. Consequently, corporate advisers were prompted to focus on liabilities that were contributing most to these deficits and to consider if there was anything that could be done to “manage” them within the legally constrained environment in which DB pension schemes operated.

The liabilities that caused the greatest funding strain were those such as pension increases and deferred pensioner liabilities, as these were fixed at a particular level of increase that was much higher than the medium term prospects for interest rates in the UK. The solution the industry came up with was to offer options for members to either reconfigure their benefits – e.g. a pension increase exchange – or to incentivise deferred members to transfer their pension to another registered pension scheme. For some members, this might enable them to reshape their benefits to suit their needs. It was in this “creative” environment that some sharp practices started to be mixed up with some well-meaning and well run liability management exercises.

A Code of Practice was issued in June 2012 as the industry was becoming concerned that not all members were making the best long term decisions, and in particular more attracted to the cash incentives. There were seven principles set out in the Code on how to run such an exercise, mainly focussing on clear unbiased communication to ensure members made informed choices, but the most significant recommendation was the prohibition of cash incentives as they were seen as distorting member decisions.

Given this backdrop, it was with some surprise that then Chancellor George Osborne in his 2014 Budget announced a radical overhaul in how defined contribution (“DC”) pension savings could be accessed, including an option to take all of it in cash to buy that infamous Maserati. Despite the best efforts of both the government and the pensions industry, “pension freedoms” remain only loosely understood. Consequently, “pension liberation” or “pension scams” continue to thrive, preying on some of the most vulnerable in society. A “pensions scam” is an arrangement that attempts to “inappropriately release funds from HMRC registered pension schemes”, and by that they mostly mean gain access to monies that a registered pension scheme would not be able to provide. A Code of Practice for combatting such scams was issued in March 2015, and the Pensions Regulator (“TPR”) has spent a significant amount of time warning people about pension liberation. It is therefore unfortunate that, notwithstanding the laudable intention, “pension freedoms” provides an ideal environment for these arrangements to seem plausible and genuine.

These opportunities often arrive from a cold call with the enticements to transfer, including access to cash (without regard to amount or age) and unrealistic returns on monies invested, all for very “reasonable charges”. Some of these “scams” are difficult to detect as they have the appearance of being above board, with the receiving arrangement being a registered pension scheme and all the paperwork looking completely bona fide.

If a healthy 54-year-old client comes to see to you to discuss an opportunity regarding his pension benefits in an occupational pension scheme, it is wise to gather as much information as possible regarding the opportunity, as well as any paperwork available. The most popular opportunity is likely to be that he has been offered a chance to transfer his pension from his current occupational pension scheme to another registered arrangement run by the financial adviser. Under this arrangement he may be being told he can access half of his pension savings immediately in the form of cash, with a further opportunity to invest the balance in a high risk but high return investment product. Whilst these choices may well be available under the receiving pension arrangement, it is unlikely that they have come with any of the necessary health warnings. These are some of the classic hallmarks of a pensions scam.

The minimum age for accessing pension savings is 55, unless the individual is suffering from an incapacity. Therefore, this opportunity would clearly be in breach of the current law around taxation of pension schemes. However, if in fact he has been told that it will take a number of months to organise the transfer, such that your client will be over age 55, then it may not be so obvious that it is a scam, as pension freedoms do allow individuals to “cash in” their savings. With this said, if it is a pensions scam then the consequences for your clients in either case are the same and could be disastrous for them personally. They could be left with little or no income in retirement, and significant liabilities to Her Majesty’s Revenue and Customs (“HMRC”) which may not be readily available.

HMRC and TPR are both interested in these scams from different perspectives; HMRC from a compliance point of view, as well assessing any tax charges due, and TPR from its statutory duty to protect members of pension schemes. The TPR website contains very helpful pension liberation pages that are well worth reading.

Pension scheme trustees are also interested, given the most common example of a pensions scam is the opportunity to transfer pension savings from an HMRC registered occupational pension scheme to another registered arrangement.
So what should you do if presented with a client who is keen to access some or all of their pensions savings as cash and/or make a high risk investment? The most important thing is to ask some basic questions:

• Did the client get this idea from his normal financial adviser or was it a cold call?
• Is the receiving scheme registered with HMRC? If so, ask for evidence of their registration. If it is a personal pension, confirm that the operator or provider is FCA authorised.
• Is the receiving scheme recently established by a newly registered employer, a dormant employer, or geographically distant from you?
• What are they offering in terms of cash and are investment choices normal and operated by a regulated company?

If any of the answers to these questions cause concern then you must warn your client that this could be a pensions scam and outline the potential consequences of proceeding with the opportunity. If it is proven to be a pensions scam, this could result in a significant tax bill at the very least, and at worst, include losing all pensions savings in some unregulated investment arrangement.

The first of these questions is perhaps the most obvious one and the easiest to answer. There was a proposal to stop cold calling but many of these pension scammers have moved overseas to avoid any consequences, so this idea has been dropped. Also, in this instance it looks like your client has already realised he needs proper advice, which is clearly the first step on the journey to work out if the opportunity is one worth pursuing for him or her.

The other questions, particularly around the receiving scheme, can be more challenging in terms of getting information from your client, as they may not have all the details readily available. The previous system for registering pension schemes was one of the chinks that allowed pension scammers to thrive. It was easy for “scammers” to register a pension scheme with HMRC by simply going online and completing the relevant form. In contrast to how normal occupational pension schemes operated, to be a registered pension scheme there was no need for members of that scheme to have an employment relationship with the employer who had established it. This was how the “scammers” were able to offer membership of schemes to members of the public.

However, the process for registering a pension scheme with HMRC has now changed. HMRC are now required to carry out a risk assessment process before deciding whether to register a pension scheme and they now have powers to de-register. If the receiving scheme is registered then you need to verify the date that this was done. If you have more general concerns, you can contact HMRC to check the registration is not subject to a deregistration notice and ask about any concerns they may have about the scheme being used for a scam. This will then indicate what further due diligence might be required.

This issue of registered schemes being used for scams was a real headache for trustees. One of the requirements for a tax approved transfer is that it must be to another registered pension scheme so if that condition is met then it was often very difficult (particularly before the change in HMRC processes for registration) to refuse to make the transfer, even if the trustees had severe doubts and felt they were not in the members’ best interests. Some of the pension scammers had registered offices in parts of the UK with no obvious connection to the member, and hundreds of schemes with an employer registered at that address.

As mentioned above regarding cold calls, some of the receiving arrangements can be established abroad or be geographically distant in the UK from your client. If the receiving pension scheme is established abroad then it is possible to check HMRC’s list of Qualifying Recognised Overseas Pension Schemes (QROPS). Even if the scheme is listed, you should look out for any planned transfer being paid to the country where established, and whether the member completed appropriate forms with HMRC. QROPS also have to submit a new undertaking to HMRC since 14 April 2017.

Some trustees refused to make transfers, which became the subject of a number of Pensions Ombudsman decisions and the higher courts. The cases focussed on the very real dilemma between an individual’s statutory right to a transfer if certain conditions were met and the trustees’ duty to act in members’ best interests. The line of decisions are pretty clear: so long as any conditions applying to the statutory right to transfer are satisfied, trustees should not resist paying transfers to individuals, notwithstanding their own view on the appropriateness of transferring those benefits.

HMRC realised the ease with which these scammers could register pension schemes and registration requirements are being tightened up again. Consequently, HMRC will be given powers to de-register schemes with dormant companies after 6 April 2018.

Trustees are required to take investment advice from someone authorised to do so by the Financial Conduct Authority (“FCA”) (or reasonably believed by the trustees to be sufficiently qualified in financial matters) before making investment decisions. Given the purpose of a pension scheme is generally to provide for some form of retirement income, it tends to lead to some recognisable investment strategies. Because of this, unusual strategies or an unregulated investment vehicle are a red flag; especially a concentration in a certain investment off shore.

If an opportunity proves to be a pension scam, tax charges apply to both the individual and to the pension scheme that made the payment. For the individual, there would be an “unauthorised payments charge” of 40% of the value of the transfer payment, and possibly, further “unauthorised member payment surcharge of a further 15%”, which applies if the member accessed more than 25% of their pension savings as cash. For the scheme, there might be an “unauthorised scheme payment charge”. If the transfer was to an overseas scheme that is not a QROPS, this would be an unauthorised payment with similar consequences for both the scheme making the transfer and for the individual.

You should warn your client that the trustees of their current arrangement are severely restrained from protecting their members against themselves, even if they might want to do so. If all the statutory requirements have been met, it is unlikely your client would have any recourse against the trustees for making the payment or any prospect of having their benefits in the relevant scheme reinstated.

Kate Payne, Partner
This article was published in Taxation Magazine