Pensions Bulletin 2015/13

Pensions Regulator refreshes its Scorpion materials as the threat mutates

The Pensions Regulator has refreshed its scorpion-branded pension liberation fraud literature, which now goes under the banner of an exhortation to “scamproof your savings”, reflecting the fact that the nature of the threat to pension savings has changed and could take on a whole new dimension with the DC flexibilities coming on stream this April.

As before, the literature comprises:

• A warning leaflet for members, which the Regulator suggests is included with transfer quotes and with annual benefit statements
• A longer booklet for members, which the Regulator suggests is sent with any member communications; and
• An action pack for trustees, pension professionals and administrators which provides some background for trustees on how to spot potential pension scams, what to do if a scam is suspected and who to contact

There are some significant changes from when these documents were last updated in July 2014. In particular, they focus much more on the warning signs with the intention that members will not unwittingly fall prey to the latest generation of scams which include overseas transfers of funds, promises of lucrative returns and single investment propositions. They also reference the April 2015 changes, pointing out that those over 55 may still be at risk from scammers, asking trustees and administrators to signpost members to the Pension Wise service, and encouraging individuals to possibly speak to the Pensions Advisory Service or an authorised adviser before making lifetime decisions.

Comment

Those who thought that pension scams were under control need to think again. They seem to be taking on a new lease of life in the run up to April 2015 and could well become a permanent fixture in the pension scene. The routes to market may be as before (cold calls, text messages and website pop-ups), but the mechanisms employed to part the individual from their pension pot have changed. In particular, there seems to be a greater use of single member schemes such as the SIPP, SSAS and increasingly, QROPS.

Combating Pension Scams – new Code of Good practice launched

With perfect timing, the Pension Liberation Industry Group has launched a new Code of Good Practice which is designed to help trustees, pension scheme administrators and providers combat pension scams. It is applicable on a voluntary basis to all transfer requests processed from 16 March 2015.

The Code sets out three principles designed to help trustees make only valid transfers and to help them to put members in a position to make an informed choice. These principles are that trustees, providers and administrators should:

• Raise awareness of pension scams for members and beneficiaries of their scheme
• Have robust, but proportionate, processes for assessing whether a receiving scheme may be operating as part of a pension scam, and for responding to that risk; and
• Generally be aware of the known current strategies of the perpetrators of pension scams in order to inform the due diligence they need to undertake and refer to the warning flags as indicated in the Regulator’s guidance, FCA alerts and Action Fraud

The Code goes into a great deal of detail about the background, the legal basis for members’ transfer rights, the regulatory framework and the potential negative consequences for trustees of paying (or refusing to pay) a transfer to a suspected pension scam. It sets out a suggested due diligence process, along with tools, for evaluating transfer requests and specifies the considerations for deciding whether or not to pay. The tools include:

• Standard information/evidence required by the transferring scheme to enable a transfer to proceed with reasonable assurance that it would not result in a pension scam
• Guidance on reasonable steps to take to minimise delay and provide reassurance to all parties
• A set of example letters
• Standard information provided to and requested from members and other parties, including ways to raise member awareness of pension scams
• Additional information to consider when dealing with transfers to a SIPP, SSAS and QROPS
• The steps for reporting suspicious cases; and
• A guide to help trustees and providers identify some “red flags” which may indicate the need for greater scrutiny

The Group intends to review and update the Code on a regular basis to ensure it reflects current risks and good practice.

Comment

Although of considerable length, this Code is packed full of useful materials to assist trustees and their administrators perform due diligence over transfer requests, the volume of which is only likely to accelerate from this April. With no changes to the law in prospect to assist those processing transfer requests, it seems that the dilemma for trustees and providers that first came to light a number of years ago will remain for the foreseeable future. As such, this Code is essential reading and will hopefully help trustees to keep up with the ever evolving nature of pension scams.

Pension scams – some war stories

In a timely reminder that pension scams remain a major concern the Pensions Regulator has issued three reviews of determinations made in 2013, and a determination notice made in 2014, that respectively confirm the banning and imposing of a ban on a number of individuals and companies from acting as pension scheme trustees. They are as the result of investigations into a number of pension schemes alleged to be liberation vehicles. Independent trustees have been appointed in their place.

In related news, Jack Straw, now sitting as an independent MP, raised the question of pension liberation fraud in an adjournment debate in the House of Commons in respect of one of his constituents who had unwittingly fallen victim to an alleged scam. During this debate the Financial Secretary to the Treasury had to justify the tax penalties applying to victims of such frauds and the role of the HMRC registration process.

Comment

There is nothing particularly novel about the latest batch of Regulator actions. Indeed, a read of the Fellowes and Becker determination is instructive as exemplifying most of the warning signs – cold-calling, excessive fees, high-risk investments based overseas and incorrect statements to members about tax – which trustees should be alert to. In relation to Fellowes and Becker, over £11m came into the schemes concerned in a seven month period before they were shut down, most of which headed to an “investment bond” in Liechtenstein.

Should the employer debt regime be adjusted for non-associated multi-employer schemes?

This is the essence of the questioning in a consultation document issued by the Department for Work and Pensions (DWP) that seeks to gather evidence in this tricky area.

For some while now, the DWP has been working behind the scenes with those who have raised concerns that it is overly onerous for employers, seeking to rationalise their pension costs, who by ceasing to employ active members in a non-associated multi-employer pension scheme are required to pay a buy-out debt. It is also suggested that this debt could drive some employers out of business unnecessarily.

The consultation paper sets out and discusses the current arrangements, existing easements and outlines the pros and cons of the following that have been suggested:

• Trustees to be given greater flexibility to arrange a debt repayment plan with a departing employer so that the employer would not always be called upon to pay up immediately – such a plan might be subject to approval by the Pensions Regulator
• Ceasing to employ active members to not be treated as a debt trigger where the employer remains financially active – instead the employer should be required to continue to fund their existing liabilities under the scheme funding requirements, and the trustees should have the power to trigger the buy-out debt under certain circumstances; and
• A change to the way the liability is calculated following an employment-cessation event – for example, if the employer is able to demonstrate a strong covenant then the debt could be determined on the scheme’s technical provisions basis

Importantly, should the DWP be minded to legislate on any of these, they would only be available to non-associated multi-employer schemes. However, at this stage the DWP is not making any proposals, nor committing to any future changes.

Consultation closes on 22 May 2015.

Comment

This is tricky territory. In many ways the public policy arguments for departing non-associated employers to pay the full buy-out debt (and on the nail) are stronger than for associated employers. The proposals would also add to an already complicated system of employer debt calculation and place further ongoing burdens on the trustees. On the other hand there are a number of industry-wide schemes out there that started life in a different era whose participating employers are now somewhat stuck. Although it seems that something ought to be done, it is far from clear what will prove to be acceptable to the various stakeholders.

The PPF sails towards the seas of self-sufficiency

As it approaches the tenth anniversary of its inception, the Pension Protection Fund (PPF) is still confident that it will meet its self-sufficiency target by 2030.

The PPF’s Strategic Plan for the next three years (2015-2018) highlights what the PPF wants to achieve and how it intends to do so. For investment returns, that means a target of 1.8% pa relative to its liabilities, which the PPF intends to achieve by adding illiquid assets to its portfolio and moving to its new Statement of Investment Principles. The PPF expects costs to rise by £41m between 2014/15 and 2015/16, largely due to increased fund manager fees as a result of this move and higher assets under management.

The project to bring member services in-house has been delayed slightly, with the PPF now intent on fully implementing the programme by the end of 2015. But the expected efficiencies of moving the administration in house are clear – the PPF expects the average administration cost per member to fall from the £79 in the latest accounts to just £60 by the end of 2017/18.

More worryingly, the PPF forecasts that scheme funding is only likely to improve slightly over the coming three years and insolvency rates are likely to gradually rise – overall the expected claims on the PPF may well increase in the near future.

Comment

Quite what self-sufficiency means is not spelt out, but there is no doubt that ten years ago the PPF could have been knocked off course, if not sunk outright, by a few very large claims. The ambition is that by 2030, any remaining schemes will be funded more healthily and that the PPF will have grown so large that claims from this date will be low relative to the size of its liabilities.

Independent advice regulations now settled

The final set of regulations relating to the new DC flexibilities being undertaken by the Department for Work and Pensions published in draft form earlier this month have now been laid before Parliament and come into force on 6 April 2015.

The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) Regulations 2015 (SI 2015/742) add the necessary detail to the Pension Schemes Act 2015 requirement that trustees must check that “appropriate independent advice” has been received by a member or survivor before certain transactions can take place. The final regulations are, to all intents and purposes, identical to those issued in draft. See Pensions Bulletin 2015/10 for a detailed summary of their contents.

In related legislation:

• The Order that requires appropriate independent advice, in relation to the transactions covered by these regulations, to be regulated by the Financial Conduct Authority (see Pensions Bulletin 2015/06) has now completed its passage through Parliament. The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2015 (SI 2015/731) comes into force on 6 April 2015
• A new Order “grandfathers” firms which currently have permission for advising on pension transfers and pension opt-outs to advise on these transactions (see Pensions Bulletin 2015/11). The Financial Services and Markets Act 2000 (Regulated Activities) (Transitional Provisions) Order 2015 (SI 2015/732) comes into force on 6 April 2015

HMRC finalises its DC flexibility regulations

Three sets of draft regulations issued by HM Revenue & Customs (HMRC) in December for a technical consultation have now been laid before Parliament and come into force on 6 April 2015.

As before (see Pensions Bulletin 2015/02 for a summary of their contents):

• The Registered Pension Schemes (Provision of Information) (Amendment) Regulations 2015 (SI 2015/606) are concerned with necessary changes to the information requirements as a consequence of both the Finance Act 2014 and the Taxation of Pensions Act 2014. They are only slightly changed from the draft regulations
• The Registered Pension Schemes (Transfer of Sums and Assets) (Amendment) Regulations 2015 (SI 2015/633) update existing regulations with the intention of preventing unintended advantage being taken of the flexibilities being introduced by the Taxation of Pensions Act 2014. They appear to all intents and purposes to be the same as the draft regulations
• The Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2015 (SI 2015/673) amend existing regulations to ensure that the conditions a qualifying overseas pension scheme (QOPS) or qualifying registered overseas pension scheme (QROPS) must meet to enjoy tax reliefs similar to a UK-based registered pension scheme remain appropriate after the 6 April 2015 changes. However, reversing the change proposed in the draft, both QOPS and QROPS must continue to use 70% of those funds attracting UK tax relief to provide an income for life for the individual unless they are established in the EEA or are regulated in the country or territory in which they are established

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.