Out-Law Analysis 5 min. read

Industry tightens up on pension scams as losses hit £10bn

Pension schemes face tougher due diligence requirements on transfer requests as new figures show the amount lost to pension scams and fraud has hit £10 billion five years after the introduction of the pension freedoms.

Regulators, courts and The Pensions Ombudsman (TPO) have all made significant statements in recent months which cover both the fall-out from previous scams and the prevention of future scams. In its recent report, the House of Commons Work and Pensions Committee called on the government to take quick and decisive action to protect pension savers, against the backdrop of new opportunities for scammers during the Covid-19 pandemic.

The committee cited figures by the Pension Scams Industry Group (PSIG), of which I am a member, which estimate that around 40,000 savers have lost around £10bn to scams since 2015, based on an estimate of 5% of all pension transfers showing typical scam signs. This month, PSIG updated its voluntary code of good practice for the pensions industry – but with so many developments on the horizon, it is likely another update will need to follow before the end of the year.

Tougher due diligence requirements and greater scope for compensation

A recent TPO decision has moved the goalposts for ceding schemes accused of inadequate due diligence in relation to transfers that took place in 2013, when The Pensions Regulator (TPR) began its scorpion-themed anti-scams campaign.

Previously, TPO had suggested it was reasonable to give trustees three months leeway from the point at which the campaign began to ensure appropriate processes were in place to guard against the risk of transferring pensions into scams. The new decision shows that TPO has since reassessed that timeframe, reducing it to one month as, in the view of the ombudsman, this period of time “would generally be sufficient for a provider to put in place any procedures necessary as a result of” the new guidance.

This may not seem a significant change, but it is likely to generate activity from claims management companies keen to pursue complaints on behalf of scam victims, and trustees might need to reassess certain transfers made during those early months of the campaign and consider whether they did in fact do everything that could be reasonably expected of them at that point. The reduced timeframe was not critical to TPO’s determination in this case, but it remains to be seen whether the point is challenged in the context of a future complaint.

Ceding schemes may also be interested to note the High Court’s November 2020 decision in PPF v Dalriada Trustees, which gives rise to increased scope for compensation being paid to scam members – and, potentially, reducing the financial burden on ceding schemes who would otherwise be required to reinstate a pension pot lost to fraud at their own expense. Pinsent Masons, the law firm behind Out-Law, acted for Dalriada, the independent trustee of the defrauded scheme, in the proceedings.

When we talk about pension scams, the common assumption is that we mean a case where the victim has lost their entire pension pot. However, this is often not the case, and the judgment could impact the approach a ceding scheme takes in respect of a complaint where its due diligence undertaken in relation to a transfer request was not as good as it might have been. Suddenly there is a chance the affected member might have a prospect of receiving compensation via their scammed scheme if a successful claim can be made on the PPF’s Fraud Compensation Fund.

However, ceding schemes need to be careful here. TPO’s approach has been to allow a ceding scheme to recover from a scam victim to the extent that the victim recovers some or all of the scammed pension. However, it is not easy to see how to create an enforceable agreement with the former member regarding the pension with the scammed scheme – it would not, for example, be possible for the pension to be assigned because of the rule in section 91 of the 1995 Pensions Act, which renders unenforceable any assignation or surrender of pension benefits.

What was previously thought to be hypothetical now has the potential to become a live issue as a result of the High Court’s decision. It would be worth any schemes in the position of considering reinstating a pension – whether in the context of their internal complaints process or following a TPO determination – to seek legal advice before formalising any arrangement.


We are beginning to see more enforcement action against scammers and fraudulent schemes in recent times, including the recent news that TPR sought and achieved extradition of a former trustee of schemes involved in pension scams. That individual, along with two others, is now facing criminal prosecution.

Increased enforcement is a welcome development, as there has often been a sense that not enough has been done to bring scammers to account – however, this case is just the tip of the iceberg, and there are still plenty of individuals with strong evidence against them of their involvement in scams operating unchecked.

Looking to the future

The House of Commons Work and Pensions Committee is producing a series of reports to mark five years from the introduction of the pension freedoms, which gave savers more choice over how to use their pension pots. Its first report, on pension scams, notes that along with the well-publicised benefits of “freedom and choice”, the new pensions world has also created new opportunities for scammers and fraudsters.

The committee has produced a wide-ranging set of recommendations for the government, looking at prevention of scams as well as providing greater support to victims. They include re-branding multi-agency pension scams task force the Project Bloom as the Pension Scams Centre, with a statutory remit and dedicated budget and staffing, in order to address what is seen as the disjointed current approach to tackling the problem, and better intelligence-sharing on scams across industry. The report also proposes relaxing the rules on tax charges for scam victims who can show that they have been the victim of a crime, and pressing forward with plans to reform the statutory right to transfer, as set out in the Pension Schemes Act.

While there is much more work to be done before any of these recommendations become reality, the report does a good job of bringing together the various different strands in this area and identifying some of the biggest weaknesses in the current legal and regulatory regimes. A consultation is expected shortly on draft regulations that are likely to make far-reaching changes to the statutory right to transfer, including allowing trustees to block transfers when certain ‘red flags’ are shown during the due diligence process and a requirement for independent guidance when certain ‘amber flags’ exist.

These changes – intended before the end of the year – are eagerly awaited by the pensions industry, and have the potential to change the game once again. However, their implementation will require quick action by trustees and providers – and we can expect scammers’ approaches to evolve just as quickly.

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