'Increased perception' of pension scheme fraud since Freedom and Choice introduced, expert says

However, pension disputes expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com, said that it was too early to link these reports with new pension rules introduced in April 2015, which gave members of defined contribution (DC) pension schemes more flexibility to access their pension savings without necessarily having to buy an annuity or face punitive tax charges.

Fairhead was commenting as RSM, the professional services firm, published the results of survey in which over a third of pension schemes had experienced fraud. The proportion of scheme trustees, secretaries and pension managers reporting fraud rose to 37%, up from 17% of respondents to a similar survey conducted in 2013, RSM said.

"This report does seem to point towards an increase in the amount of fraudulent activity occurring with pension schemes - or at least a perception of that from amongst those surveyed," Fairhead said. "Of the frauds identified, it is interesting that 77% related to member transactions and transfers, which seems to accord with the majority of pension frauds relating to scams or 'liberation' as opposed to breaches of IT systems or accessing of member data. This, in turn, ties in with continuing reports within the industry of suspicious transfer requests, which do not seem to be showing signs of abating."

"The temptation is to link this increase more specifically with the introduction of 'Freedom and Choice'. This was also the conclusion drawn by some from the recent publication of figures by City of London Police showing a steep rise in the amount of money reported as lost to pension scams between April and August of this year compared with the same period last year – effectively a doubling in value from £4.5 million to £9.1m. However, the impact of the new rules on reported fraud is unlikely to be felt immediately," he said.

Figures obtained by Out-Law from City of London Police (CLP) showed that, of those individuals reporting financial loss as a result of suspected pension liberation fraud between April and August this year, 64 were aged between 56 and 65 - a decrease from the 84 individuals in this age group who had reported losses over the same period in the previous year. Although not all those reporting their suspicions to Action Fraud, the central fraud line now operated by the CLP, chose to record their age, Fairhead said that he would have expected this figure to be higher "given that this is the bracket that most people making use of the new flexibilities would fall into".

"That is not to say, of course, that the changes in April 2015 are not likely to bring about a significant amount of fraud, but I would expect any sophisticated fraudster to make it difficult for his victim to find out about the loss suffered for some months or even years afterwards," he said.

"This could be done easily by claiming that a sum is locked up for a substantial period of time in an 'investment' in order to generate a better return, only for the victim to be told some time later that the investment is now worthless or reduced to very little, no doubt as a result of the high risk nature of the investment. Little will the victim know that the money had probably been dissipated by the fraudster very shortly after it was paid over. Certainly the figures for another 12 months' time could make for very different reading," he said.

Pension scheme rules prevent individuals from claiming pension benefits until they reach the age of 55, unless doing so on ill-health grounds. Tax charges on 'unauthorised' payments can be as much as 55% of the value of the payment. Changes to the law from April this year gave members of defined contribution (DC) schemes more freedom to access their savings any way that they wish once they turn 55 without incurring heavy tax penalties, although the rules remain as they are for those that have not yet reached pension age.

RSM surveyed 142 trustees, secretaries and pension managers from schemes collectively responsible for more than £40 billion of members' savings as part of its research. As well as recording an increase in the number of schemes experiencing fraud, RSM also found that over half had identified requests for member transactions suspected of being scams. In addition, almost 60% of respondents said that pension scams were the biggest fraud-related threat to members' pension funds.

The survey also revealed some "worrying signs of complacency" amongst pension professionals in relation to fraud risks. Just over a quarter of trustees surveyed did not know that they themselves were responsible for putting fraud detection and prevention systems in place, while 50% said that they had not tested their internal controls within the past 12 months as recommended by the Pensions Regulator.

Pension disputes expert Ben Fairhead said that despite the apparent increased risks to member funds from fraud, an "unsatisfactory" legal position often made it difficult for pension providers and trustees to prevent suspicious transfers.

"Those faced with transfer requests remain confounded by, on the one hand, a desire not to see individuals fall prey to a scam but, on the other, a struggle to justify declining transfers where there is arguably a statutory right," he said. "We will have to see whether next year brings greater clarity through the courts or, ultimately, conceivably legislative change."