'Employment link' test should help deter pension scammers, expert says

Provided it is sufficiently onerous, the proposed requirement that the saver have a 'genuine employment link' with the receiving scheme would deter those behind the vast majority of pension schemes that have, in recent years, been presented as pension scams or 'pension liberation' models.

There might be limited additional circumstances in which legitimate transfers to occupational schemes would be caught by this proposed requirement, justifying the need for specific carve-outs within any new legislation. However, the less complicated the criteria for establishing the statutory right, the more straightforward it should be to recognise and act upon - while trustees would, of course, retain their discretion to permit legitimate transfers that do not meet the new requirements.

The problem

Current legislation limits the grounds on which a pension scheme can refuse a statutory transfer request to a scheme which looks like a scam.

In the past, providers often requested proof of an earnings relationship between the scheme member and the potential receiving scheme, giving them legitimate grounds on which to justify a refusal to transfer into a scheme they suspected was a scam where this could not be provided.

However, in 2016, the High Court, following the letter of the law, pushed back. It agreed that pension savers needed to show earnings, but decided that those earnings could come from anywhere. This decision made life just a little easier for the scammers.

Pinsent Masons, the law firm behind Out-Law.com, was instructed by the provider, Royal London, in this case, which appears at least in part to have been the catalyst for the government's recent consultation on pension scams. The government has proposed the introduction of a 'genuine employment link' test, which would require "evidence of regular earnings from that employment and confirmation that the employer has agreed to participate in the receiving scheme".

Originating schemes would not have to seek this information if the transfer was to a personal pension scheme operated by an FCA-authorised entity or to an authorised master trust, and would still be able to use their discretion to allow a transfer in accordance with the scheme rules where the test was not met.

The solution

Introducing a regular and genuine earnings link would deter those behind many of the most popular scam models of recent years for a variety of reasons.

Some of the models used in recent years are arguably not fraudulent at all, but simply poorly conceived and involving very high risk. Historically, where fraud has been identified in a pension scam, it has usually been more concealed and subtle than the production of a fake earnings link to meet the proposed new test would be.

It would take a particularly bold and committed fraudster to implement a fake earnings link. It is also difficult to see this happening without the fraudster parting with its own cash upfront in order to establish that link, presumably on the basis of being recompensed if the pension funds are subsequently received. Few fraudsters are likely to be prepared to take that risk, given it would presumably be difficult to recoup the cash if the individual's transfer does not go ahead - which, in a climate of caution from trustees and providers, is a real possibility.

At the same time, the individuals making the transfers sometimes seem to be aware that the cash payments that they are receiving might be subject to tax charges if discovered - but there is little evidence to suggest a wholesale level of complicity from the individuals transferring into suspected pension scams. It ought to be more obvious to an individual being asked to implement a fake earnings relationship that the intended transfer is not legitimate.

Implementation

Any future earnings and employment link would be best included either within secondary legislation or in guidance. This would make it easier to update should it become apparent that fraudsters are in fact working around the rules, or indeed if the requirements are becoming unduly restrictive for those who have genuinely good reasons for transferring their pension funds.

Specific criteria should be set out to establish when the earnings link is proven, so that discretion is removed as far as possible for those considering whether to allow a transfer. Otherwise, there is a risk of continuing uncertainty for the ceding providers and trustees - leading to greater internal costs and potential external legal costs, as well as probable inconsistencies in approach and greater scope for complaints to the Pensions Ombudsman.

Given the rise in the 'gig economy', the earnings link needs to take account of zero hours contracts and flexible working patters. With that in mind, requiring evidence of an average of earnings over, say, a two-month period would be preferable to expecting a fixed, regular sum. It does not seem unreasonable to expect minimum earnings of £100 a week in order to establish the test has been met. This would require evidence of approximately £800 - £900 to have been paid in earnings before the statutory right is established.

It seems more reasonable to place the onus of providing proof of earnings on the scheme member, at least initially; who could be asked to provide copy bank statements or payslips evidencing salary payments. However, it does not seem unreasonable to look for some evidence from the prospective receiving scheme employer too. This could take the form of a signed statement that the transferring individual is indeed employed, has been for a specified period and has received earnings that are not going to be 'offset' against his or her pension once transferred.

Arguably, a 'fraudulent' employer is likely to sign anything. However, a clear fraudulent statement like that would also make it easier to seek redress or prosecution against that employer if the fraud were subsequently exposed. Conceivably, The Pensions Regulator's powers could be strengthened to take action against employers shown to be falsely signing statements like that.

Equally, the individual wishing to transfer could be asked to sign a similar statement, which might focus minds more if complicit in an intended fraud.

Impact on trustees and providers

Provided specific guidelines as to the level and period of earnings required in order to meet the new test are set, the costs of implementation should be considerably less than what is likely to have been expended in the past few years by those being asked to make transfers.

It will not entirely remove the need for ceding providers or trustees to undertake the sort of due diligence envisaged by The Pensions Regulator and set out in the Code of Good Practice. This will still be an essential part of the process, as it sometimes leads to feedback being given to members and has occasionally served as a deterrent to suspicious transfers being made. However, the initial focus of the due diligence process is likely to shift to the earnings link - and, if that is not established, there might not be need for other forms of due diligence at that stage.

The decision-making process after that will become more straightforward too. As matters stand, many providers and trustees are uncomfortable making transfers even where, on the face of it, there is no legal basis to object. This is because they have concerns about individuals transferring pension funds into suspicious-looking schemes and often as a result of extreme pressure being placed on them. These transfers can often result in internal and external costs being incurred as consideration is given as to whether there is any basis for declining them.

Bringing in the earnings link will, however, reduce significantly the number of difficult transfer requests. At the same time, if individuals are prepared to go to the lengths of fabricating an earnings relationship for a period of at least a couple of months before making a request there will be limits to what can be done to protect them against pension schemes. Specific criteria will also leave much less room for doubt as to whether the provider or trustee has acted appropriately when allowing or declining a transfer request, thereby reducing the scope for and scale of potential complaints to the Pensions Ombudsman.

Although restricting the statutory right to transfer will very probably lead to providers receiving a greater number of 'non-statutory' transfers to consider, the steps leading to that are likely to be no different from presently, given that due diligence would be undertaken to establish the legitimacy of the intended transfer.

Provided the exercise of discretion one way or the other was based on a sensible assessment of risk, particularly taking into account guidance from The Pensions Regulator and the Code of Good Practice, providers and trustees should be protected against the risk of complaints - or, at least, successful complaints.