Pensions consultancy reports huge increase in pension scheme fraud

The annual report, from consultants Baker Tilly, recorded a 55% increase in pension schemes reporting fraudulent activity. Of the survey respondents 19% said they had experienced cases of fraud, compared to 12% of respondents in 2011.

“Awareness of the issue may be rising against a backdrop of more pension frauds hitting the headlines, including high-profile investigations involving illegal cash transfers, false schemes, money laundering and bribery allegations,” it said. The accuracy of member data was considered the most vulnerable area for fraud by the survey’s respondents.

Most of the reported incidences of pension scheme fraud came from larger schemes with more than 10,000 members, Baker Tilly said. These schemes accounted for 70% of reported fraud cases despite making up only 31% of respondents. However, the report acknowledged that larger schemes were more likely to identify problems due to “stricter governance frameworks”.

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that it was a "sad fact of life" that fraud levels tended to increase during times of economic stress. However, he noted that the report had highlighted an increase in more serious types of fraud.

"Most pension schemes will have come across a spouse 'forgetting' to report a pensioner's death, or exaggerated claims in applications for ill-health early retirement - most trustees are aware of these risks and take appropriate measures to counter them," he said. "However, this report highlights the risk of serious, professional fraud such as misappropriation of data, unauthorised changes to records and fraudulent transfer calculations. Relatively few trustees will have encountered any cases of this, and few will have thought about how the risks could be tackled."

Tyler said that trustees should check that their risk governance strategies were appropriate.

Despite the higher percentage of reported fraud 21% of the survey’s respondents said they had “not actively considered” fraud risks over the past 12 months - a higher percentage than the 15% reported last year. Only 7.5% of schemes had introduced a formal fraud response policy, while 35% of schemes had not tested their internal controls for more than a year - meaning they fell short of the regulator’s recommendations.

The Pensions Regulator states that risk assessment is a “continuous process” which must take account of a changing environment, and that internal controls should be reviewed at least on an annual basis “or sooner if substantial changes [to the scheme] take place”.

Baker Tilly warned that as its figures only took into account “detected fraud” which was reported by affected schemes, the figures might not reflect the full picture.

“Some fraud may be identified but not reported, which begs the question: should the Pensions Regulator be taking a stronger stance on fraud reporting - giving scheme members the right to know if their scheme has suffered from fraud or attempted fraud?” it concluded.