As Britain basks in its best summer since 1976 with sweltering temperatures and drought restrictions on water usage, a series of small but important stories have made their way into the pensions world which should give all employers (whether they are final salary, or money purchase, or participating in master trusts) pause for thought. Although seemingly unrelated, employers who ignore the implications could be building up problems in their workforce for the future.
A new campaign by the Financial Conduct Authority and the Pensions Regulator showed 253 scam victims reported losses of more than £23m (averaging £91,000 per person) from their pensions in 2017. Everyone suspects this is merely the tip of the iceberg, and a recent Ombudsman's decision has highlighted even the Police are being duped as a result of pensions scams. In a recent determination, the Pensions Ombudsman had directed the Northumbria Police Authority to reinstate the accrued benefits of one of its officers because it failed to warn him about pension scams.
In the unusual structure of public sector pension schemes, this was in the context of the Northumbria Police Authority administering the pension arrangement. However, there are salutary lessons here for all employers in respect of the type of scheme they provide.
Members of all types of schemes are being targeted for free pension reviews, promises of guaranteed high profits, early access to pension or exotic overseas investments, including hotels, forestry and green energy schemes. The end result is for the victim of the scam to transfer their benefits away from the bona fide registered pension scheme, which the employer provides, to one where the victim's funds are drained by the scammers. In the Northumbria Police case, although the individual involved requested the transfer, the Police failed to send him a leaflet provided by the Pensions Regulator warning about potential scams and conduct, adequate checks and enquiries in relation to the new pension scheme.
While, at the moment, the responsibility for undertaking these steps falls on the pensions scheme provider or trustees and administrators, the practical consequences of dealing with the scam will often fall back on the employer, and we are already starting to see cases where individuals believe employers have not taken sufficient steps to protect employees. Equally, we have seen cases where individuals may have built up pension pots, but as a result of being scammed, now cannot afford to retire and therefore present succession planning issues for the business.
Another story reflects the opposite side of the coin. A recent study has revealed that the amount of tax collected from individuals breaching the life-time allowance (LTA) has been increased from £10m in 2006/2007 to £100m in 2016/2017. Many of those employees will be in a final salary scheme where for lifetime allowances purposes, the valuation of their benefits is on a basis of 20 times their annual pension entitlement. Given the recent surge in transfer activity from final salary schemes to occupational DC schemes, individuals can often end up with far more value than they originally believed they had, leading to LTA issues. Other contributory factors include generous contributions from both employees and employers, significant pay rises and employees who have implemented one of the numerous HMRC protection regimes in the past, suddenly discovering that the protection they thought they had is now invalid.
This is a particular issue in connection with auto-enrolment where employees are re-enrolled every 3 years, so even if an employee has opted out of the work place pension scheme to safeguard their position, they are still at risk of breaching it, as they will be dropped back in to the scheme in 3 years' time. And if just one month's contributions is paid, this would invalidate their protection. Again, if this happens, businesses are likely to have disgruntled employees often at mid-management or senior levels.
So what can businesses do?
Although currently there is no strict legal liability on any employer to warn its employees in relation to pensions scams or potential issues around breaching the lifetime allowance, it is clearly good practice that, at the minimum, businesses should make enquiries amongst their senior employees as to whether anybody has existing protections in place before implementing re-enrolment.
It is possible for businesses to take further practical steps. It is common knowledge levels of disengagement around pension issues across most businesses are very high and a way to address this is to have professional external engagement with employees via training sessions, webinars or updates highlighting the danger of pension scams or potential risks in relation to breaching lifetime allowance. This would allow employees to instigate their own checks, and to do these updates on a regular basis would lead to employees undertaking their own checks as normal behaviour. It would also highlight these issues within the business process and may make the business itself, more proactive in terms of dealing with these issues.
We hope that everyone has a great August Bank Holiday and avoids the traditional August Bank Holiday traffic and rain.
Originally published 23rd August 2018
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