Major pension changes are coming. And they will place a special responsibility on pension brokers and independent financial advisers.
For a government to stay quiet about a potential vote winner is rare. Especially in an election year. Yet that is exactly what is happening when it comes to pensions; meaning the extra responsibility will have to be shared by those in the industry.
To great fanfare, the government announced last year that reforms would come into effect this April giving us all greater freedom on what we do with our pension pots. But now, with an election less than three months away, the government is in a position where it cannot make a comprehensive effort to publicise reforms that could endear it to the public.
As an election is on the horizon, the Department for Work and Pensions – and all other departments – are prevented from spending public money on what could be viewed as something closely associated with one particular party. While this may be frustrating for Cameron and Co, it also poses problems for those working in pensions. The legal situation effectively means that any promotion of the large-scale pension changes is being left to the providers and financial advisers. At least until a new government is in place.
Pessimistic voices have predicted chaos; claiming that pension providers will struggle to deal with the reforms in the early days. Others have warned that pension holders could be easy targets for those looking to get their hands on people’s pension pots by illegal means. Many in the industry have asked for a major publicity drive to make sure anyone affected by the reforms is aware of them. Critics of the reforms have argued that the changes are rushed and an attempt to win votes without any consideration of the long-term consequences.
Under the reforms, anyone aged 55 and over can have access to all of their pension pot. They no longer have the obligation to buy an annuity. Announced by Chancellor George Osborne in his Budget last year, the reforms are so all encompassing that both the Pensions Advisory Service and Citizens Advice are gearing up to provide advice about them to anyone needing it.
There have already been reports of pension holders being cold called and encouraged to cash in their pension plans early or transfer them to risky offshore investment schemes. Persuasive talk of free pension reviews, early access to cash and schemes promising high returns have become common. Pension group Phoenix has stated that, since the announcement of the reforms, it has prevented more than a thousand savers losing £22million to what it believes was attempted pension fraud. Standard Life says it has blocked around 400 suspicious transfers, totalling almost £14million, but is concerned that April could see more attempts at pension fraud.
Some pension experts have accused the government of being complacent when it comes to people’s vulnerability to fraud under the reforms. Prior to these reforms, anyone looking to gain from pension fraud had to create a fake pension scheme. From April, they have to be far less elaborate in their attempts to part people from their cash. It may seem unfair but it may well fall to those in the pension industry to protect their customers from such predators.
For some in the industry this may seem as if an extra responsibility has been added to their already busy schedule. It may even seem tempting to simply go about the work without paying any extra attention to the potential for fraud. After all, if it is not the independent financial adviser (IFA) or pension broker perpetrating the fraud, surely they cannot be blamed for it. It would be an interesting argument – and one that would carry some merit – if it wasn’t for the fact that the Financial Conduct Authority has set out its stall in a way that expects much from IFA’s and pension brokers. Since its creation in 2013, it has laid down standards and principles for pensions selling. At the same time, the Pensions Regulator seems especially keen to make sure sufficient regulation exists in the industry and that any risks associated with pension products are fully highlighted to would-be buyers. To put it bluntly, anyone who sells a pension product that turns out to be fraudulent or who advises a client who subsequently loses their money to fraud will have an awful lot of explaining to do to the authorities.
The question that has to be asked, therefore, is what precautions can those involved in pensions take to make sure they are not left with defrauded clients and a lot of explaining to do? The simplest answer is “Do your homework.’’ If a client is being advised to make a potential investment, the person giving that advice has to be 100% sure in themselves that it is a safe step to take – and if there are any apparent risks then these have to be made explicitly clear to the client.
If the trial last year in relation to Operation Cactus Hent indicated anything, it was that it is up to IFA’s and pensions advisers to make sure they are not involving themselves or their clients in any form of wrongdoing; whether wittingly or unwittingly. The case centred on pension fraud and the way that pensions can be targets for tax fraud. It failed to secure any convictions. But it is fair to say that the IFA’s who were in the dock would now be the strongest advocates of checking any pensions proposals as thoroughly as possible – both for their and their client’s sake.
The authorities are keener than ever to crack down on fraud and cases that may have resulted in a civil law resolution a few years ago are now being treated as criminal matters. In fairness to them, the authorities are providing assistance for IFA’s and pension providers and administrators. The Pensions Regulator, for example, has drafted advice for those in the pensions industry as well as literature for the public warning of the most common type of pension fraud. But what of the fraud that is more subtle or unique? The type that has not yet been highlighted in publicity? Just as boiler room-type frauds have become increasingly sophisticated over the years, there is no reason to believe the same will not happen with pension fraud.
If this is the case, the onus is still on those advising members of the public – the pensions professionals will be the ones who have to explain why and how they allowed a client to lose their funds to a fraud. This may seem harsh and the professional who falls foul of such a fraud may argue that they took all reasonable precautions. But at this stage, the issue is one of damage limitation. Anyone in such a situation will need appropriate legal advice from experts: experts who can rebut prosecution claims of negligence or even dishonesty by proving that the accused acted appropriately and took all possible precautions and has a professional history of integrity and honesty.
The pensions industry is set for a mini revolution in the coming months. It is important that the professionals in the industry make sure that they and their clients do not become the victims of change.