Pension scams – the key things to look out for

26 September, 2017
This article has been reviewed and is up to date as of 26 September, 2017

Pradeep Oliver, a financial services negligence specialist at law firm Cripps, looks at the upsurge in pension fraud following the introduction of the pension freedom reforms.

The pension freedom reforms announced by George Osbourne in 2014, were welcomed by most people with personal pensions. Individuals over 55 were allowed the flexibility of being able to obtain access to their own pension pots without being forced to take out low paying annuities at retirement.

 

Unfortunately, the freedoms are something of a double edged sword and have opened the door to a record level of unsuitable “non-standard” investments being marketed to ordinary retail customers.

 

In the current climate of unprecedented low interest rates it is easy to understand why a low risk  investment promising guaranteed double digit returns is an alluring prospect, however consumers should bear in mind the well-worn mantra that “if it seems to be too good to be true it probably is”.

 

Figures released by the City of London police showed that reported losses sustained in pension scams soared to a monthly  high of £8.6m in March 2017. The figures show that more than £42m has been lost to “pension liberation fraud” since April 2014. It is likely that the true figure is much higher as there is some reluctance on behalf of victims to report their loss.

 

What are the warning signs?

 

Cold calling 

Customers are called out of the blue by unregulated companies offering a “free pension review service”. This is the first step of a slick sales operation designed to convince the customer that his or her current pension is not performing adequately and that there are far better options on the market. This leads to an introduction to a well marketed non-standard investment scheme promising high returns for little or no risk.

 

Exotic sounding and/or overseas investments  

Due to their high risk nature, most traditional pension schemes are not permitted to hold these non-standard assets in their funds.  

 

There are a myriad of non-standard pension investments on the market at the moment, varying from shipping containers, storage pods, overseas farmland, biofuels, carbon credits, fine wines, hotel rooms, commercial property schemes to overseas property developments.

 

The FCA website (www.fca.org.uk)has provided a helpful warning list that identifies the investments to watch out for and suspect firms.

 

Common features of non-standard assets are:

  • Speculative – the investments are hugely volatile. The success or failure of the investment often depends on highly unpredictable market forces (for example the rental demand for a storage pod in a particular location).

 

  • IIliquid – there is often no ability for a customer to obtain a return of capital for a fixed period without paying huge redemption penalties. 

 

  • Unsellable/difficult to value – even after the initial fixed period there is often no easy way to exit from the investment because there is little or no secondary market, therefore the investments are very difficult to value.  

 

Guaranteed returns

Guaranteed returns for a fixed period are an obvious attraction but the guarantee is often no more than an incentive to obtain as much investment as possible and is not indicative of the ongoing return that an investor could expect to achieve. It is not unusual for the return to be a limited return of the capital that was originally invested and not growth at all.

 

What can I do if I have invested in non-standard assets?

Victims of these operations often consider that there is nothing that can be done. This is not necessarily so.

 

A business must be authorised by the FCA to conduct investment business, these are known as “regulated activities”. Regulated activities cover most investment advice,  including arranging an investment, particularly if it concerns a pension transfer. If an individual or firm engages in a regulated activity without possessing the necessary authorisation this is a criminal offence.

 

There are comprehensive rules which govern the provision of financial services and particularly the marketing of investment products to individuals. If a customer has suffered loss as a consequence of a breach of these rules it may be possible to recover losses. 

 

There are various avenues that can be considered to recover losses, these can involve a complaint to the Financial Ombudsman Service, the Financial Services Compensation Scheme or a civil claim through the courts and legal advice should be sought to advise on the most appropriate course of action.

 

If you have any questions or would like further information please contact Pradeep Oliver on 01892 765 453 or at pradeep.oliver@cripps.co.uk.

 

First published in the July edition of Inside Kent.