Combating pension scams: The Code of Good Practice

Introduction

The Pension Liberation Industry Group published a Code of Good Practice on Combating Pension Scams on 16 March 2015.

The Code, which is aimed at trustees, administrators and providers, sets out the steps to be taken when dealing with transfer requests from pension scheme members, including industry standard due diligence.

Key points

The Code sets a voluntary industry standard for dealing with requests by members for pension scheme transfers.
It includes a number of example communications, including letters to members and discharge form wording, as well as an example pension scam decision sheet.
The Code does not replace or override existing requirements or guidance issued by TPR, the FCA or Action Fraud.
It is available for use in any transfer request processed on or after 16 March 2015, even if the request for a transfer was received before that date.

Background

Pension scams have been gaining momentum in the wake of the financial crisis and, with the introduction of the new pension freedoms from 6 April 2015, we are likely to see even more pension scheme members targeted.

The new Code has been produced by the Pension Liberation Industry Group with the twin aims of providing guidance on good practice and reducing the risk of successful scams.

Three core principles

The Code sets out a number of steps to be taken in order to protect scheme members from pension scams. These have been distilled into the three core principles for trustees highlighted below, which apply equally to pension providers and administrators.

Raising awareness (Principle 1)

The Code recommends that trustees should raise awareness of pension scams amongst members and beneficiaries by:

providing TPR’s “Scorpion” materials in transfer packs and statements, as well as on websites, and by sending information to scheme members directly, rather than through their advisers
ensuring administration staff are aware of the risk of pension scams and are familiar with the Scorpion materials
where relevant, making employers aware of the risk of pension scams.

The assessment process (Principle 2)

The Code explains that trustees should have in place 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. These should include:

carrying out proper due diligence that is appropriate to the type of the proposed receiving scheme
assessing the various risk factors, including the risk of a scam, the risk of making an unauthorised payment and the risk to trustees of not complying with their statutory deadline for dealing with a transfer request
communicating with the member to explain either that they do not have a right to transfer or the reasons why, on the basis of the available evidence, a transfer should not be paid
discharge forms that are suitably robust to reduce risk.

Awareness of current scam strategies (Principle 3)

Trustees should be aware of the known current strategies of the perpetrators of pension scams. As the Code explains, this will help inform the due diligence they need to undertake. Among other things, trustees should be aware that pension scams:

may use documents that look like legitimate scheme documents
often mimic the normal transfer process
may promise high or guaranteed returns, and
that perpetrators of pension scams often use pressure to force a transfer through and may coach scheme members to answer basic due diligence questions posed by trustees.

The due diligence process

As the Code notes, “the legislation relating to transfers is not prescriptive as to due diligence that trustees/providers should carry out on transfer applications”. The aims of the Code are therefore to set out industry standard due diligence to follow when considering a transfer request and to help those involved in the administration of registered pension schemes assess members’ transfer requests.

The key is for trustees to carry out “a reasonable level of due diligence”. They should not rely solely on HMRC’s registration process. As explained in the Code, this means:

carrying out initial analysis to verify basic information, such as the member’s name and address and, in relation to the proposed receiving scheme, its name, address, HMRC registration number and payment details
where trustees are unable to rule out the risk of a pension scam following initial analysis, trustees should query the status of the receiving scheme with HMRC and carry out further detailed due diligence. The Code notes that the questions to ask will depend on whether the receiving scheme is an occupational pension scheme, a SIPP / other contract-based scheme, a SSAS or a QROPS. The guidance sets out in detail different questions for each type of receiving scheme
where necessary, applying to TPR for an extension of the time limit for processing a transfer request.

Once the risk of a pension scam has been fully assessed, the trustees will need to decide whether the member has a right to a transfer (either statutory right or a right under the scheme’s rules), and whether they can proceed with or refuse to make the transfer.

Having made the decision

The Code goes on to explain the steps to be taken once the decision whether or not to proceed with a transfer request has been made.

Proceeding with a transfer

Where trustees are satisfied that a member has a right to a transfer, they should:

make the transfer within six months of the member’s application, or the guarantee date in the case of a DB scheme
ask the member to sign a discharge form in which they give a number of confirmations. This is particularly important when dealing with a member who is insistent on taking a transfer, despite having been informed of trustees’ concerns that there is a risk of a pension scam. An example discharge form is included in the Code.

Refusing a transfer

Where there is no right to a transfer, the transfer request should be refused. The trustees should then:

write to the member explaining why they are unable to proceed.
report to the appropriate regulator and to Action Fraud where there are indicators of potential pension scams.

The Code includes a number of example letters which can be used as a basis for communicating with members, HMRC, TPR, advisers and the proposed receiving scheme.

Record keeping

In all cases, it will be important for the trustees to keep records of their investigations. They may also wish to maintain an internal “white list” of schemes on which they have carried out due diligence.

An example “Pension scams decision sheet” is included in the Code.