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Regulate pension liberators to protect the vulnerable

When it comes to pensions liberation, more regulation is needed to prevent vulnerable consumers, says B&CE’s Christine Brightwell.

Pension liberation has become a hot topic.

A common view is that only the self-employed with pots of £40,000 or £50,000 are targets, with these liberators, having no interest in the small stakeholder pots.

While that may have been the case in the past, it certainly is not now. Now even the smallest pots are targeted.

Some will be persuaded to transfer on the promise of a cash incentive “if they move quickly”, sometimes the sell is that they can sweep up all existing defined contribution pots (and even sometimes defined benefit), some as little as a few

hundred pounds, into a new scheme.

This incentive presents the member with the chance to tidy up their finances and get a cash bonus into the bargain.

Others are lured by the promise of a “loan” against their pension savings, maybe as modest as £1,500 against a pot of £2,000 or £3,000.

In these hard pressed times, scheme members are very receptive to these offers.

Sadly, many of those with small pots never see a penny of their savings again, as they are swept up into the “new scheme”.

Increasing the available targets

With automatic enrolment, we now have hundreds of thousands of individuals being swept into pension saving. This is a good thing in general, but it also means that there will be even more financially naïve scheme members to be preyed upon. And make no mistake, they will be.

People are short of money; with redundancies, pay cuts and pay-day loans, the possibility of getting their hands on even a modest sum is hard to resist.

We know that people are often not good at the self-discipline of saving for the future. We could hear many explanations including, “It is such a small pot, it won’t give much of a pension anyway”, “It’s my money”, “I need the money now”.

The approaches to members are varied with unsolicited telephone calls, texts, emails and in person. The last of these may sound surprising but it is happening and it is on the rise.

You can hear the stories already: “I met him when I was on the building sites. He lives on the estate. Can’t remember his name, not seen him since.”

But in this case “he” persuaded the member to authorise a ‘Pension Transfer Specialist’ to ask for information on their behalf. A non-FSA registered individual who – from the cut-and-paste questionnaire received – has little understanding of how pensions are structured.

“They came to my house, after a phone call. Beat me down on the cash incentive.”

The related trust deed and rules (and I use the terms loosely here) were also clearly hand-knitted. In relation to those, an apt comment was made: “if it were a second hand car, it would be called ‘cut and shut’”.

At first glance, as the scheme was registered with HMRC, to an inexperienced eye it may have looked okay.

However, on closer inspection, it included two powers of amendment and unlimited charges on members – features which are definitely not ‘okay’.

Transfers – things we need to think about

Where we are not convinced that a scheme is above board we will not make a transfer. We would encourage other providers and trustees to think about doing the same.

Pension transfers are under the jurisdiction of The Pensions Regulator.

The legislation governing transfers (including contract-based DC) is in DWP legislation. Transfers can, as we all know, only be made to appropriate pension arrangements.

This presents a tricky little point that trustees/managers transferring members’ pension pots may want to think about.

If you are not sure the destination is a proper place to send a transfer, you may not actually get good discharge. Ouch! So, having transferred the funds you still retain liability to the member.

I would also suggest that the duty of the trustees to scheme members may be construed as greater than that of a bank to its customers – as they hold the benefits on trust.

What back-up is there for trustees, managers and administrators?

While providers and trustees will be doing all they can to support the regulator’s excellent “Don’t let your pension become prey” campaign, there are other steps the Government can

take to help protect its plans for people to save for their own future.

HMRC no longer checks the deed and rules of schemes applying for registration, they only reserve the right to require copies be provided.

One of the first checks made on transfer requests to an unfamiliar scheme is HMRC registration.

But if registration can be achieved without even cursory reviews of documentation, it makes it very easy for the frauds to be perpetrated, making the pension savings of the financially unsophisticated easy pickings.

So please…

It is still, sadly, too easy for anyone to register a pension arrangement with HMRC and this will become more and more of a problem.

Not just in relation to the current outbreak of pension liberation but also if we move onto any kind of automatic transfer for small pots in the future.

It goes against the grain I know, but please can we have some more legislation – to compel HMRC to carry out proper due diligence, including a fit and proper test akin to that used by the FSA on those trying to register new pension schemes?

This is an unusual request when it comes to regulation of pension schemes, but please sir, can we have some more?

Christine Brightwell is director of regulatory governance and risk at B&CE, provider of the People’s Pension

Christine Brightwell is director of regulatory governance and risk at B&CE, provider of the People’s Pension

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