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Out-Law News 3 min. read

'Genuine employment link' among government proposals for tackling pension scams

The statutory right to transfer pension savings into another occupational scheme could be limited to cases in which the saver has a "genuine employment link" with the receiving scheme, under plans put forward by the government.

The proposal is one of three main recommendations contained in a government consultation paper on pension scams, along with a ban on cold calling and tougher registration requirements for single-member occupational pension schemes. Such schemes are seen as "an easy way for fraudsters to register a pension scheme with HMRC [HM Revenue and Customs]", according to the consultation, which closes on 13 February 2017.

Current legislation gives pension schemes limited scope to refuse a statutory transfer request to a scheme which looks like a scam, "even if they have legitimate concerns as to the safety of a member's savings", according to the consultation. In February, the High Court ruled that a pension provider was not entitled to deny a transfer request on the grounds that the saver, Donna-Marie Hughes, was not an 'earner' under the rules of the receiving scheme.

"The proposal to introduce a requirement of a genuine employment link to a receiving occupational pension scheme would make it much more difficult for scammers to exert pressure on pensions trustees to transfer funds into suspicious schemes," said pensions litigation expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com. Pinsent Masons was the lead legal adviser to Royal London, the pension provider in the Hughes case.

Fairhead said that "the devil will be in the detail" of working out what a 'genuine employment link' and 'regular earnings' would look like. However, "any change in this area is likely to be an improvement on the current legal position", he said.

"Recognising and tackling the issue of dormant companies that are all too often used as vehicles for pension scams is similarly encouraging," he said.

"There will no doubt be a lot of debate generated about the proposed changes and some contrasting views. However, there will have to be some compromise, as leaving the law as it currently stands is making it too easy for pension scammers. The one fly in the ointment might be the window of opportunity that remains now for scammers before any change to the law is brought into effect - which could be many months away. It would be sensible for a government to think about some interim measures to prevent the sort of upsurge of activity that might otherwise result whilst the law remains in its current unsatisfactory state," he said.

There were 30,000 defined contribution (DC) pension scheme transfers in 2015/16, representing £1 billion of assets. Fraudsters could be behind as many as one in 10 of these according to Xafinity, the pensions consultancy, whose figures were cited by the government in the consultation document.

The government has proposed to tackle this by introducing a 'genuine employment link' test, unless the member has requested a transfer to a personal pension scheme operated by an FCA-authorised entity or to an authorised master trust. The test would require "evidence of regular earnings from that employment and confirmation that the employer has agreed to participate in the receiving scheme", according to the consultation.

Where this evidence was not available, trustees and pension scheme managers would still be able to use their discretion in order to allow a transfer where this was accordance with the scheme rules. Trustees and managers would be expected to "make all reasonable efforts to agree a transfer request" to a scheme that did not appear to be a scam. As an alternative to limiting the statutory right to transfer, the government is also seeking views on a requirement that 'insistent' scheme members sign a waiver limiting any recourse to the ceding scheme in the event that the receiving scheme turned out to be a scam.

The government is proposing an outright ban on cold calling relating to pensions, which it wold introduce through primary legislation. The ban would be enforced by the Information Commissioner's Office (ICO) using its existing powers to impose civil sanctions on UK-based firms, including the power to issue fines of up to £500,000. Such a ban would "cut off a key source of pension scams while significantly simplifying the anti-fraud message to the general public: that you will never be cold called about your pension", according to the consultation.

The proposed ban is intended to catch various types of pension scams, including misleading offers of 'free pension reviews' or high return pension funds. "Legitimate" interactions, including where consumers have expressly requested information from a firm or where an existing client relationship exists, would not be caught by the ban. The consultation acknowledges that there is little the government can do to prevent cold calls from overseas if the company is not registered in the UK. However, the government said that consumers would be "indirectly" protected due to the "strong message" against engaging with cold callers that the ban sends to consumers.

Finally, the government has proposed the introduction of a new requirement that single-member occupational pension schemes, such as small self-administered schemes (SSAS), can only be registered with HMRC through an active company. As these schemes do not have to be registered with the Pensions Regulator and can currently be set up using a dormant company as the sponsoring employer, they are "an easy way for fraudsters to register a pension scheme with HMRC", according to the consultation.

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