The pension freedom reforms introduced two years ago have given millions of people much-needed flexibility in their retirement finances. But they have also provided new opportunities for the unscrupulous. A Serious Fraud Office (SFO) investigation into an alleged £120m scam is the latest potential scandal to hit the pensions industry, amid a sharp increase in pension-fraud losses over the past three years.
The SFO announced last week that it is investigating an alleged investment fraud in which scammers persuaded at least 1,000 people to move their pension-scheme savings – including cash invested in high-quality final salary occupational pension schemes – into a plan that promised high returns from self-storage units. The alleged fraud saw savers attracted by the promise of guaranteed returns of up to 12% from the storage pods, but these returns have never materialised. The SFO said it did not yet know how many people in total had invested in the Capita Oak Pension and Henley Retirement Benefit schemes, and is urging investors who moved money into these plans between 2011 and 2017 to get in touch with its investigators.
The alleged scams appear to be typical pension liberation schemes, through which savers in good-quality pension plans are encouraged to switch their investments into unregulated investments supposedly offering very attractive guaranteed returns. Such schemes have proliferated since the pension freedom reforms, since these have made it far easier for savers to cash in their pension funds in order to invest the money elsewhere. Savers who move their money into unregulated investments may have little recourse if performance subsequently disappoints.
The assets underlying such schemes are often illiquid and difficult to value accurately – and in some cases, their money has simply disappeared. Property-related investments are a common theme, with the SFO also warning last week that it is looking into two other pension liberation schemes, the Westminster Pension Scheme and the Trafalgar Multi-Asset Fund. Investors in these schemes were told their money was being invested in a variety of assets, including loans linked to property and assets in countries such as the US and Mauritius.
The Financial Conduct Authority, the regulator that polices the pensions industry, has warned savers to be very wary of unregulated investment schemes – and to ignore cold calls from financial advisers seeking to sell them, a common tactic. It has also begun publishing a list of the pension-scheme scams it knows about on its website, in an attempt to provide savers with an early warning system. Nevertheless, pension fraud continues to be a growing problem. Some £8.6m-worth of losses were reported to City of London police in March alone, more than ten times the figure recorded during the same month of last year, according to figures obtained by the Financial Times.
The growing scale of the problem has prompted calls for government action to tackle fraud in the industry. There is already a legal requirement for anyone transferring more than £30,000 out of a final salary pension scheme to show they have received independent financial advice on the transaction before it proceeds.
However, while free guidance is available to all savers approaching retirement, when people become entitled to make use of pension freedom, this state-backed scheme, known as Pension Wise, falls short of full-scale independent advice. The government has also been criticised for failing to get a ban on cold calling of all types on to the statute book. Although a consultation exercise on a ban on cold calling closed in February, the legislation necessary was put on ice because of the general election.