Thank you for the opportunity to submit evidence to you on our insights into and experiences of pension scams. Along with the rest of the industry we have significant concerns on the risks occupational pension members face when they leave their schemes.
Given this, XPS has taken action to help protect pension members. In 2015 we established a scam protection service that engages one-on-one with members leaving their schemes. This has helped protect nearly 4,500 members leaving schemes, representing over £1bn in transfers. In 2018 we also started following every transfer from schemes we administer to better understand who is leaving occupational pension schemes, where they are going and what their outcomes may be.
Reflecting on this, we believe there to be a wider issue than simply the criminal activity of pension scams. In our experience, many members are transferring to legitimate destinations that are inappropriate for their needs, often with charges and features that they do not need.
In our view the balance of responsibility and oversight is skewed too far away from the occupational pension industry. In simple terms, pension trustees often view it as their responsibility to see that a fair transfer value is made available to members. Once the transfer value has been quoted it is entirely up to the member whether they wish to take it and, just as importantly, where they will transfer it. Trustees do not want to see their members being scammed, but any further support regarding the suitability of the receiving vehicle and the associated charges are typically left to the members to consider themselves.
This is perhaps because pension trustees have legitimate concerns around unintentionally straying into regulated advice if they seek to provide further support to members. Another reason is because any loss typically happens in the regulated retail market as opposed to occupational pension market. However, this can lead to situations where the only ‘independent’ advice available to members might be from an adviser who has a vested interest in members choosing certain types of receiving vehicle, especially where the adviser then has an ongoing role.
We consider that members can best be protected before they move from the occupational market into the retail environment. We feel with additional regulatory guidance and protections for trustees, more would be done to protect members
We also believe the robust regulatory framework we now have for defined contribution master trusts could play a substantial role in offering safe havens for those pension members who want to access Freedom and Choice. For this to take hold a key step would be for such schemes to be included as a matter of course as a ‘default vehicle’ for schemes when transfer values are quoted, or at the very least for them to be required to be included in financial advisers’ assessments of possible transfer destinations.
We hope that the information we have shared helps with your investigations. We would be more than happy to clarify or discuss any of the information provided.
Co-Chief Executive Officer, XPS Pensions Group
XPS Pensions Group are pleased to respond to the inquiry on protecting pension savers – five years on from the pension freedoms: Pension scams.
We are extremely supportive of the inquiry and believe there is more that can, and should, be done by the pensions industry, supported by appropriate legislation, to protect members from pension scams and poor retirement outcomes.
XPS Pensions Group has followed members leaving schemes for the past three years to understand outcomes and has offered a scam protection service to pension trustees for five years. A summary of our key points of evidence based on this is shown below, with further comments on each question set out in the following pages. We would be happy, if helpful, to speak to you about our approach and evidence further.
XPS Pensions Group (XPS) is a UK specialist in pensions actuarial, investment consultancy and administration. We provide a wide range of advisory and compliance services to over 1,200 pension scheme clients and administer the benefits of nearly one million members. XPS is listed on the London Stock Exchange.
In 2015, XPS put in place a service to help clients to protect their members from pension scams. For the last three years we have also been monitoring the outcomes of transfers from defined benefit pension schemes.
The service we provide to clients on scam protection is based on the Pension Scams Industry Group’s Code of Good Practice. It involves a telephone call with all members looking to transfer their benefits. During the call the member is asked specific questions, as set out in the Code. This helps to establish whether there are any warning ‘red flags’ that indicate that the member is at risk of being scammed. We categorise these red flags under the following broad headings:
Where any ‘red flags’ are identified the case is referred to our compliance team who then support the client to take further action. Our systems have kept a record of every call that has been held since 2015 and we therefore hold a wealth of information on both the number and type of red flags that have been identified, and how these have changed over time.
We have also been conducting a survey on member outcomes under freedom and choice over the last three years. This survey looks at data across all of the schemes that we administer and follows each and every transfer out. This provides us with information on which members are choosing to transfer, where they are transferring to and the actions that have been taken to provide support to these members.
We have provided evidence from these two data sets to support our responses to the questions below. We would be happy to provide more detail on the data we hold if that would be helpful.
Our focus on protecting member outcomes is wider than just looking for intentionally dishonest or fraudulent scams. Poor choices and poor outcomes for people leaving an occupational pension can have devastating consequences and we believe trustees, employers and advisers of occupational pension schemes should seek to do as much as they can to help protect members. While an individual is a member of an occupational scheme they can be supported by a vehicle that has scale to provide good education, communication, access to advice and institutional pricing for investment fees. This support most likely ends when the member leaves the scheme.
Given the above we have sought to provide evidence in answer to this and the next question that is wider than what may be thought of as a direct scam. The ways that an individual can lose some pension value due to the unsuitable actions of another party or poor advice and education can include:
Worryingly, our research shows that the vast majority of defined benefit transfers are potentially to vehicles that may be overly sophisticated and expensive relative to individuals’ needs. At the same time, around a quarter of transfers over the last five years have exhibited a red flag warning of a possible pension scam. This has increased significantly over the last couple of months since the onset of lockdown and the financial consequences of COVID-19 on individuals.
Destination of defined benefit transfers
The table below summarises the destination of all transfers from schemes we administer. Not surprisingly the majority of members transfer to a personal pension arrangement. What is worrying for us is the level of fees the average member will pay in these vehicles given the size of the transfer and the impact of fees on available income. The average transfer of £290,000 over the last twelve months typically represents a DB pension given up of less than £10,000 pa. Not included in the average annual charge is any ongoing fees that may be levied by the financial adviser or other third party appointed to manage assets.
1 January 2016 to 30 June 2018
1 July 2018 to
31 March 2019
1 April 2019 to
31 March 2020
Average transfer amount (£000’s)
Proportion of transfers to a full or platform Self Invested Personal Pension
Average annual charge of destination vehicle
Incidence of red flags in pension transfers
The table below shows the incidence of at least one red flag (that may indicate a pension scam) in all transfer cases for schemes that subscribe to our scam protection service. This is elaborated on in the answer to question 2. The value of transfer cases below are lower than that in the table above as providing such protection to members is voluntary for trustees and employers and so the information covers a different data set.
Year to 30 June 2016
Year to 30 June 2017
Year to 30 June 2018
Year to 30 June 2019
Year to 30 June 2020
% of transfers exhibiting a red flag
Value of transfers for red flagged cases
Our scam protection service engages directly with a member leaving an occupational pension scheme and through a carefully structured conversation identifies red flags that may indicate a scam. This information allows trustees to take action. There are over 40 specific red flags we identify, and these are classified into six broad types of red flag. These are set out below.
The overall incidence of red flags has been increasing over time and in particular over the months since the COVID-19 pandemic we have seen this rise to around 50% of cases.
The more traditional warning signs of scam activity such as cold calling and the use of couriers has fallen over time whereas issues with fees have significantly increased. Over the last five years IFA issues and receiving scheme issues dominate the total number of red flags that we see.
Incidence of red flags by year
Year to 30 June 2016
Year to 30 June 2017
Year to 30 June 2018
Year to 30 June 2019
Year to 30 June 2020
Issues with fees
Receiving scheme issues
General lack of knowledge
More detail on each red flag type is given on page 2.
We have not yet been able to track to the end the outcome of cases where we identify red flags. We do provide guidance to and carry out investigations for clients to help them support members where a warning red flag has been identified. We have however recently developed a new system which will now allow us to track these cases through to the final member outcomes and we would be delighted to demonstrate this to you if helpful. Data from this process will build up over time but we have included some real-life case studies from our work in the Appendix.
We have seen the effects of pension scams on pension scheme members and our work in identifying those at risk of pension scams means that we often see the early signs of scams being committed and changes in the methods used. We are not alone in this and are aware of many organisations in the sector who work to draw the attention of regulators to issues being identified.
We are also aware of the enforcement tools in place. However in our view they have been slow and relatively ineffectual against those who seek to persuade members of pension schemes to transfer to arrangements that are either scams in their own right or which charge such high fees or offer such poor investments that individuals are always worse off.
The enforcement tools in place are often too fragmented because many parties are involved in the perpetration of a scam and enforcement then falls to various bodies. Each of those bodies have some tools at their disposal to take action but often these are not enough. We could highlight examples if that would be helpful.
At the root of these issues is the need for high quality information and prompt action. Taking each of the bodies in turn:
Regulated firms are required to submit product sales data to the FCA. The FCA have also asked firms to submit additional data. However, even though the data should exist, poor quality financial adviser firms have been allowed to continue advising on high volumes of transfers before being banned. Even when the industry flags concerns with the FCA, it takes some time (often years) before action, if any, is taken.
For the most part, no action is taken because the numbers ‘per adviser’ are low (although collectively high) and the costs fall on the Financial Services Compensation Scheme (FSCS). Unfortunately, pensions are often much greater in value than the cover provided by the FSCS and people lose out. In addition, the costs of compensation fall on the industry. If the FCA had used its enforcement tools at an earlier juncture, this could have been avoided.
The FCA has other powers in terms of requiring advisers to act in certain ways but we have not commented on this in view of the focus on enforcement tools.
The statutory right to transfer has been at the heart of many scams. Cases which were decided by the Pensions Ombudsman (eg Hughes v Royal London) were overturned in the courts and pension trustees have since been left in an extremely difficult position. Intelligence gathered which often includes speaking to the pension scheme member may indicate that they are at high risk of a scam but the statutory right means that trustees often have no choice but to let the transfer proceed.
We are not aware of TPR exercising enforcement against trustees for not complying with the statutory right in this context and this may be because few trustees are prepared to test the issue. More often than not the scheme’s legal advisers will confirm that a statutory right exists and the transfer is paid.
Although HMRC registers pension schemes, we have seen very little evidence of HMRC being prepared to take enforcement action where schemes have been used to perpetrate scams. Indeed, HMRC have instead sought to take action against the people who were fraudulently persuaded to invest in scam arrangements. This is an example of enforcement tools being used inappropriately.
Many of the pension scams occur as a result of fraud (as set out in the Fraud Act 2006). Often these are through the false promises made by the scammers or promoters of investment schemes. In our experience, however, there is little appetite for the Police to get involved in cases of pension scams and in many cases the issue is one of understanding where the ‘offence’ has been committed. There are often technical discussions around whether an unregulated introducer can undertake certain activity within the scope of FSMA or whether a financial adviser has acted fraudulently and the complexity of pensions has, in our experience, meant that few police forces are prepared to take on a case to prosecute.
We have combined our response to this question with question 7 below.
We believe that the pensions industry has a very important role to play in preventing scams and improving member outcomes. Trustees and employers of occupational pension schemes have a better opportunity than any other party to be able to provide targeted support and education to members in a cost-effective way. Most of them would like to increase their efforts on this, however they are often hampered by fears of overstepping the line between guidance and advice. Our view is that it would be helpful if the law could provide more clarity on this position and specifically what can be provided to members without overstepping the mark.
We believe there are five specific actions that trustees should be taking to improve outcomes for their members:
Engagement, support and education are key to helping members to avoid pension scams and make appropriate decisions. Trustees need to have the confidence that they can provide this without being accused of advising members. Trustees and employers can already do this.
We have seen that most members who transfer away from a defined benefit pension scheme do so into a SIPP. Whilst SIPPs can offer significant flexibility for members, this comes with a higher cost which is unnecessary if the member does not need all of the features. These members are likely to benefit from an alternative arrangement being made easily available.
We believe that the groundwork has been done already for employers to offer this through setting up a regulatory regime for DC master trusts. These arrangements are often seen as a safe haven for those members wanting the flexibilities available under freedom and choice whilst benefitting from the economies of scale and controlled access to advice that most members leaving schemes would benefit from. Trustees and employers can already do this but we suggest that this is an area the Pensions Regulator (as the regulatory body) could provide guidance on.
Most members only have the choice between transferring all of their defined benefit pension or none of it. This presents a tough binary choice between security and flexibility.
The partial transfer option is already supported across the industry and by regulators and IFAs. However we believe that not enough schemes are currently making this option available to their members. Trustees and employers can already do this.
High-quality unbiased financial advice is critical to members avoiding scams, understanding their options and making the right decisions for their circumstances. Our survey shows that when trustees and employers help members to access such advice fewer members are advised to transfer and of those that do transfer, they do so to a wider variety of arrangements.
Trustees and employers can already do this but many trustees are still cautious about providing access to an appropriate IFA for risk of being seen to provide advice themselves. Again clearer regulatory guidance or, if needed, legislation to clarify the status of a pension trustee in the regulated advice framework would be helpful. Some employers and trustees have the view that it is not the pension scheme’s responsibility to protect members who have left or are leaving, so regulatory guidance on the responsibilities to departing members would be helpful here too.
Although this is recommended by the Code of Good Practice on Pension Scams, we believe that the majority of pension schemes are still not doing this. Our evidence shows that the calls are crucial in picking up red flags that would not be identified otherwise.
As well as preventing scams, the pensions industry should consider what more could be done to redress the losses to members and schemes where a scam does take place. In November 2019, the FCA noted that 180 people had reported that they had been the victim of a pension scam in the last year, losing an average of £82,000. Although likely to be understated, that represents nearly £15m in lost pension savings.
One option for covering the cost of this could be to allow members to claim for such losses under the Pension Protection Fund (PPF) subject to suitable protections around moral hazard. There are currently around 5,000 defined benefit schemes paying towards the cost of the PPF so this would represent an average levy increase of around £3,000 pa. We do not believe this to be a significant cost for protecting those that lose thousands. We are aware that there is a case currently testing what the Fraud Compensation Fund operated by the PPF covers which may facilitate such a solution. If it does, then we suggest a proactive rather that reactive levy which schemes can reduce if they have suitable scam protection in place. This may help drive better protection depending on the relative economics for a pension scheme.
As highlighted in our response to Q4, each of the public bodies has enforcement tools to take action. Many of those same bodies have the ability to petition Government to change laws so as to protect consumers and acting together could be a powerful force.
The most recent (2016) material protection given to members of defined benefit schemes (requiring those transferring more than £30,000 to obtain advice) has had some impact but individuals are still receiving poor advice and the number of firms the FCA is taking action against to withdraw pension transfer permissions. In each of those cases where past advice has been poor, the damage has been done. No doubt more remain undiscovered.
The FCA’s work on contingent charging will also chip away at poor quality advisers. However, those looking to make money off consumers are already turning to other methods of scamming them. Failed financial advisers are setting up (sometimes using family members as a front) as claims management companies and making claims on behalf of the very same people they advised. We have seen examples of consumers who have transferred from defined benefit schemes into SIPPs and scam investments. As the SIPP provider has failed, the former financial adviser has set up a claims management company and arranged for a new SIPP and compensation. The cycle then starts all over again with the consumer being advised to invest in high charging investments. Each time yet more of the pension fund is whittled away.
Public bodies need to listen more to the experiences of trustees, pension providers and members. They need to be gathering much more information and intelligence about the way in which scammers operate. And that intelligence has to be shared properly.
Public bodies also need to work in a much more co-ordinated manner to take action in terms of changing legislation where needed and using enforcement tools quickly to clamp down on scams as they are identified. By way of example, we are not aware of any public body formally approaching trustees or providers to ask about suspect issues or to gather intelligence.
The best tool currently available to those in the industry is the Pension Scams Industry Group which has been excellent in sharing information of concern and raising awareness. It has allowed those participating to be on the front foot but without input from the public bodies it will remain just a source of information.
Case study 1
Our administration team received paperwork from a member requesting a transfer. The paperwork was reviewed in line with best practice and did not show any signs of scam activity. It had been signed by a registered IFA who appeared on the FCA’s authorised list. A call was then set up with the member.
During the telephone call, two pieces of information raised ‘red flags’:
• When asked about the IFA, the member gave a different name to that on the completed paperwork. This IFA worked for a completely different firm and the member had never heard of the IFA on the paperwork.
• The member confirmed that he had been approached by an ‘introducer’ and forms had been completed for him by the introducer and the IFA.
These red flags were reported back to the administrators who initiated their own anti-scam procedures. They found that the IFA who had actually given the advice was not authorised by the FCA to provide such advice. In addition this IFA’s firm was not authorised to provide advice on transfers out of pension schemes.
Through subsequent investigations by the relevant compliance team on behalf of the trustees, it was discovered that:
• The unauthorised IFA had been arrested, along with all the members of the IFA firm that he was working for.
• So too had the original (FCA authorised) IFA who signed the paperwork. As the police investigation was still ongoing, his approval status had remained as authorised on the FCA website.
• The receiving scheme was confirmed as being a scam vehicle, despite having HMRC approved status.
• The introducer had also been arrested.
The trustees were able to write to the member to set out the concerns and he subsequently decided not to transfer. Had we not spoken to the member, the transfer would have proceeded. The member would have lost their entire pensions savings and potentially could have faced a tax charge of up to 55% of the value of the transfer as it would have been an unauthorised payment.
Case study 2
In this case the member lived overseas and wanted to consolidate a number of pensions. He sent in completed paperwork which appeared legitimate.
The subsequent call raised the following red flags:
• The member was not aware of where the money was being transferred.
• He had been sent papers for signing by courier.
• He had never spoken to the IFA who had signed his transfer paperwork.
On the back of the call report, the trustees wrote to the member to highlight the red flags. The member decided not to transfer (and was also able to stop transfers he was planning to make from other arrangements). Subsequently the member was advised to transfer to another arrangement by a legitimate IFA. This subsequent transfer request raised no red flags.
The IFA involved in the original case was told to cease trading by the FCA and later went into liquidation.
Case study 3
The member requested a transfer and completed the necessary paperwork.
The following red flags were raised on the call:
• The member believed she was transferring into a personal pension scheme in her own name. However the recipient scheme was actually registered as an occupational DC scheme.
• The employer linked to the scheme was based in Essex, but the member lived and worked in Derbyshire. The IFA involved was based nowhere near Derbyshire or Essex.
Further due diligence revealed that the ‘IFA’ was an ex building society employee with no authority to provide financial advice. With this information the trustees were able to write to the member providing information on where she could find a suitable IFA.
The member came back a few months later requesting a transfer to a SSAS. We were able to identify that:
• The SSAS had been set up very recently with the member as trustee, and advisers so new that they were not on the FCA register.
• The registered address was a long way from Derbyshire and there were no employment links between the employer and the member.
The Trustees refused this transfer, which if paid would likely been an unauthorised payment. As the transfer amount was under £30,000, the initial red flags would not have been picked up if it had not been for the call with the member.
Case study 4
In this case the member lived overseas and was approached in person at her place of work by a wealth management company who wanted to help her transfer her pension. The paperwork received appeared legitimate.
The call with the member raised the following red flags:
• The member understood this wealth management company was providing her with advice on her transfer.
• She was unaware of the IFA who signed her transfer paperwork.
• The member seemed surprised by the details of the transfer and fees when she was reviewing her paperwork during the call.
• At the end of the call when asked why she is transferring, the member didn’t seem too sure but said it was mainly about accessing a cash lump sum.
The member subsequently decided not to transfer. This case highlighted that the IFA which appeared on the FCA register as authorised was working with unregulated introducers and cold callers overseas. The firm was reported and subsequently had their permissions removed.