What action can we take to protect pension holders from scams?

27 September 2023

Caitlin Southall, Pension Technical Manager, Curtis Banks, examines how pension scams are threatening savers and what can be done to prevent this increasing problem. 

At the moment, it feels like every week brings about more news that financial scams are on the rise. Perhaps fuelled by those scammers capitalising on the cost of living crisis, scams are becoming increasingly sophisticated and complex.

The statistics are eye opening. A recent Freedom of Information request showed that between 2020 and 2022, over £26.4m was lost to pension scams, with an average loss of over £16,000. The FOS has released their stats this year, showing an 18% increase in pension scams  for 2022/2023 financial year vs the 12 months previous. It is important to note however, that the vast majority of that increase in complaints referred in whole or part to cryptocurrency.

The FCA estimate that only 20% of pension fraud scams are actually reported, meaning that the true scale and enormity of the issue isn’t fully known.

When it comes to pensions, people can take a hands off approach, perhaps with the understanding that through auto enrolment, their pension will continue to grow without the need to be proactive.

The passive approach to pensions that some savers take may actually play into scammers’ hands in that savers may not even realise that they have been the victim of a scam. If this eventuality does occur, and people are only engaging with their pensions as they near retirement, they may not have the opportunity to rebuild pension wealth. This can therefore have significant repercussions on the ability to retire as intended, or the comfortability of retirement.

The ongoing cost of living crisis unfortunately presents additional opportunities for scammers. With increased living costs and the potential need to support other generations as savers navigate their own financial challenges, some people may be more determined to grow (or reinstate) their pension. This may result in some clients pursuing higher risk investments, or falling victim to a scam that is perhaps too good to be true.

The cost of living crisis also presents a further challenge when fighting pension scams. One of the most common types of pension fraud is pension liberation fraud, where scammers offer supposed opportunities to access pensions earlier than legislation allows. With the increased possibility that people are looking to their pension funds to help them weather the economic storm. Scammers use emotional hooks, like the cost of living crisis, in order to access information and funds. This may increase risk in certain investment types such as ethical investing, where decisions are not purely made on financial performance.

It’s not unreasonable to expect that upcoming regulatory changes may also give rise to increased opportunity for scammers. The Pension Dashboard project, and further reliance on technology may increase both reported and unreported scams, and it will be interesting to see what controls and security measures are put in place when the project finally launches.

As is the case with financial fraud, the techniques that scammers adopt have developed. We’ve recently seen riskier investments like cryptocurrency become more prevalent on social media following the ban on cold-calling in the UK.  Often marketed as a ‘get rich quick’ opportunity, this appeals to those savers in particular who might be gearing up for retirement, or who have accessed their pension and are looking to rebuild.

We also need to look beyond the headline stats and remember the psychological impact of scams. A pension represents more than a pot of money – it is the culmination of an individual’s working life. The profound emotional impact of fraud can be substantial and under the new Consumer Duty regulations, could be a factor that could deem someone to be vulnerable due to a change in financial or emotional circumstances.

A challenge that the industry needs to overcome is the reporting of pension scams. With only 20% of pension scams estimated to be reported, it is difficult to really understand the enormity of the issue. The Pension Scams Industry Group estimates that around £10bn was lost in pension scams between 2015 and 2020. With the pandemic moving more processes and information online, coupled with the cost of living crisis, I think despite the positive steps being taken by the Government and industry,  we could reasonably see  the number of pension scams increasing.

The Government have already taken action in respect of the banning of pension cold-calling. The FCA launched Scam Smart, an online hub with information about how to spot and report scams, which is available to consumers. Advisers have an opportunity to continue to educate their clients about how to protect themselves. Providers already have regulatory requirements placed on them for certain potentially high risk processes, like pension transfers, in order to protect consumers. Is this collectively enough?

As an industry, we all have a continued responsibility to educate consumers, as well as reviewing advice, processes, products and services to ensure that consumers are as protected as possible from pension fraud. Despite educational materials and due diligence steps being undertaken, the reality is that the goalposts are always moving as far as pension fraud is concerned, scam methods change and there are economic challenges that cannot be planned for. However we collectively need to remain vigilant and adaptable in order to continue to the fight against pension scams.

Professional Paraplanner