Need to know:
- A February 2016 High Court ruling has raised concerns around savers’ susceptibility to pension scams.
- Employers can play a role in educating staff about scams to help them avoid this risk.
- Signs to look out for include cold calls and pressure to make a transfer, among others.
Employers shoulder a great deal of responsibility in helping employees to save for retirement. At times, educating staff about the need to save and the level of contributions that are needed to ensure they achieve the pot necessary for their desired standard of living in retirement can seem like a big enough task. But should employers also take some responsibility for ensuring their pension scheme members do not fall foul of scammers and hand over significant chunks, if not all, of their hard-saved pension fund?
Following a legal judgement in February 2016, there are concerns within the industry that more pension scheme members could fall victim to pension liberation scams, says Tim Middleton, technical consultant at the Pensions Management Institute (PMI).
He explains that, in the case of Donna-Marie Hughes vs The Royal London Mutual Insurance Society, Hughes brought a case against Royal London after it refused to transfer over £8,000 of her pension savings to a scheme investing in property in Cape Verde, on the grounds that it was highly likely to be a scam.
Hughes’ complaint was initially dismissed by the Pensions Ombudsman in June 2015, following which she appealed the decision. At a subsequent hearing in the High Court, a judge ruled that she was entitled to require Royal London to transfer her pension savings.
“The concern here is we now have a very dangerous legal precedent whereby people who are looking to do perverse things with their pension savings, knowingly or otherwise, are within their legal rights to do so,” says Middleton. “This has caused a great deal of consternation within the industry. Over the immediate future, what we need to look at is making sure people do not get scammed. This is a very serious problem. We probably do not have adequate legal protection to prevent it from happening. That is probably the number one priority. That is certainly an aspect we need to consider going forward in terms of freedom and choice.”
Although there is little employers can do to prevent employees from transferring their pension savings into a potentially fraudulent vehicle following the High Court ruling in the Hughes case, they can take steps to educate their workforce about the potential risks of pension scams. The Pensions Regulator’s Scorpion campaign, for example, includes a number of promotional materials that employers can draw on.
“With so many increasingly sophisticated scammers doing the rounds these days, I think certainly employers could do more to promote the regulator’s campaign about scams,” says Middleton. “The sort of things that individuals need to look out for are when they get cold called, when they get pressured into making a transfer, or when it is a pension scheme that they have got nothing to do with.”
A further challenge for the pensions industry is how to manage longevity risk as many individuals spend longer periods of time in retirement.
“As we get more people with large funds, there are going to be more people going into drawdown arrangements and we need to think about how they can be reasonably assured that they are not going to run out of money in retirement,” explains Middleton.
“There are a few strategies that have been proposed. One is gaining quite a bit of traction, which is that people consider buying a deferred annuity, which starts payment when they get to about, say, 85. The idea is that if they die before then, they do not need the money. But, if they survive longer than perhaps they were anticipating, they have then got some fallback in case they do start to run out of money.”
He adds that lessons can be learnt from other countries, which do not have a system of compulsory annuitisation. “The obvious example for the UK to consider is Australia. It is worth noting that it has had too many cases of people who do underestimate how long they are going to survive and who do run out of money, sometimes deliberately because it has a means-tested State retirement system.
“So what the Australians are starting to consider is the introduction of some sort of minimum income requirement, which is what we used to have in the UK prior to [the introduction of] freedom and choice,” says Middleton. “I would expect [to see] over the longer term that, if our experience is comparable to that of the Australians, a very similar change in this country as well and the reintroduction of the minimum income requirement.”
As with potential pension liberation scams, the role of employers in educating staff in this instance should not be underestimated.