SSASs have been used as a pension vehicle for scammers in the past, but the issue is largely dealt with and certainly there are not 750,000 problem schemes out there, as implied by The Pensions Regulator (TPR).
As Executive Director for Regulatory Policy at TPR, I expect Andrew Warwick-Thompson knows more than most about pension scams and how seemingly legitimate occupational pension schemes can be used to defraud consumers of their pension rights.
The Pensions Regulator blog
Andrew Warwick-Thompson on 'Helping trustees stop scams – why we need a ‘safe scheme list’ and a SSAS transfer ban'Read more
In his recent blog, issued the day after the Government closed its consultation on pension scams, Mr Warwick-Thompson reported that “the government’s consultation suggests there may be in excess of 750,000 one-member SSAS”. He therefore opines that “pension transfers to SSAS arrangements” should not be allowed and that “an outright ban on the establishment of any more SSAS arrangements … warrants serious consideration”.
"Banning transfers to existing SSASs would stop all 80,000 or so members of existing SSASs from consolidating their pensions into one place, which seems mighty unfair."
Personally, I find commentary on banning SSASs (or transfers to SSASs) unhelpful in that it promotes the idea that there is a simple and effective way of stamping out pension scams. In my experience, making it harder to use one pension vehicle for scams simply means a shift to another type, and use of SSAS for scamming is now passé.
I have unearthed some statistics myself, to show a more informed side of the argument. I’ll use the term 'suspect SSAS' to mean a single person SSAS which has been set up not for a legitimate purpose.
The Government’s Proposals
The Government set out a number of ideas in their consultation to thwart pension scams, including stopping dormant companies from establishing company pension schemes, removing the right to transfer to a company pension scheme unless employed by that company, and banning cold calls relating to pension transfers.
The consultation set out some sensible ideas and any unintended consequences are potentially worth putting up with, if the result is a sizeable reduction in the number of scams involving pension savings, going forward. The danger, of course, is that new legislation and restrictions will bog down the legitimate side of the industry whilst the scammers quickly identify the (fairly obvious) loopholes and carry on regardless. And when it comes to SSASs, I would question whether restricting consumer choice is worth it, given how little impact 'banning SSASs' would have on pension scam activity (in my opinion).
Banning transfers to existing SSASs would stop all 80,000 or so members of existing SSASs from consolidating their pensions into one place, which seems mighty unfair. Of course, behind Mr Warwick-Thompson’s comments must be a perception that there are tens of thousands of people still being encouraged to set up SSASs and transfer their pension savings to them.
This used to be the case a few years ago, but our experience – backed up by statistics issued by HM Revenue & Customs (HMRC) – is that this is no longer true. HMRC issue information on how many new pension scheme applications they receive each tax year – see the table.
This shows a stark increase in applications for a couple of years – when in my experience SSASs were being used as a pension scam vehicle – followed by a decrease, coinciding with my experience that SSASs were no longer considered the optimal scam vehicle. Banning them, or transfers to them, would have little effect if they are no longer being used.
Let me explain. When a scam victim is persuaded to transfer to a SSAS, this means that a new SSAS is set up especially for them, and so the SSAS has to go through the new scheme registration process with HMRC. This differs from when a scam victim is persuaded to join an existing scheme, whether it is a self-invested personal pension (SIPP) or a larger occupational pension scheme.
The new scheme registration data shows when there was a peak in new scheme registration applications (during the 2012/13 and 2013/14 tax years), following which applications fell away.
The evidence suggests, therefore, that SSAS is no longer a widespread vehicle of choice for pension scammers. When Mr Warwick-Thompson says that SSASs are “the vehicle of choice for criminals setting up a scam”, he may have been right had his blog appeared three years earlier. I no longer sense that “SSASs are increasingly marketed as ‘products’ offering exotic investments and unrealistic returns”, which is the TPR’s view as reported in the consultation paper: their use is dwindling rather than increasing.
Around the beginning of the decade, scam victims were typically being encouraged to switch their pension savings (which could include defined benefit pensions not yet in payment) into SIPPs, so as to access unregulated investments. The consumers may have been tempted by promises of immediate cash release once the investment had been made. When the industry, and the financial regulator, spotted what was happening, it became harder to find SIPP providers willing to allow unregulated investments, and so SSASs started being used as the pension vehicle from which to make these investments.
This is when SSAS took over as it was up to each individual set of trustees to decide what investments could be made by each scheme, and this led to an increase in new scheme registrations.
HMRC noticed this increase, and decided to stop the 'process now, check later' approach for new scheme registrations as of 21 October 2013. This made it harder for SSASs to receive a Pension Scheme Tax Reference, vital for demonstrating its ability to accept transfers from other pension schemes.
This resulted in a halving of new scheme registrations for the 2013/14 year (HMRC provided statistics for new scheme registrations before and after 21 October 2013 as well). Further restrictions were brought in from September 2014 which resulted in another fall in new scheme applications. The industry had also started to make more enquiries into newly set up schemes, before authorising transfers to them.
As it was harder to set up new schemes, and there were better alternatives that did not require the victims to sign as much paperwork, SSASs fell out of favour as the pension scam vehicle of choice.
The net result is that the new HMRC process has reduced the scope of SSAS being used as a scam pension vehicle, probably by around 12,000 schemes a year.
New Scheme Registrations as reported by HMRC in its Pension Scheme Newsletters:
These applications cover all UK pension schemes - not just SSAS – but the vast majority will be small occupational pension schemes such as SSASs.
Tax Year Applications
The Government asked an open-ended question about whether more regulation was needed for SSASs, based on the following statement:
“At present there are around 800,000 registered pension schemes in the UK, the vast majority of which are single member schemes. TPR’s view is that SSASs are increasingly marketed as ‘products’ offering exotic investments and unrealistic returns, and there is evidence that some consumers have lost their pension savings as a result.”
Mr Warwick-Thompson has seemingly jumped to the conclusion that the corollary of the Government’s (rather unhelpful) paragraph is that there are more than 750,000 suspect SSASs which is sufficient grounds for banning them. However, we can tell from statistics published by HMRC that there are far fewer suspect SSASs: perhaps only 5% of the 750,000 reported by Mr Warwick-Thompson.
The new era of pension scams began no earlier than 6 April 2006 (“A-Day”). There were 88,849 new scheme applications between 6 April 2007 and 5 April 2016 (10,000 a year on average) according to data published by HMRC in its Pension Schemes Newsletters 57, 63, 69 and 78. It would be ludicrous to think that there were 650,000 new scheme set ups for the missing 2006/07 tax year: a reasonable estimate might be 20,000.
This means 110,000 new schemes were established, and not all of these will be suspect SSAS of course: as well as bona fide SSASs the period covers the time (from October 2012 onwards) when employers were setting up new workplace pensions to meet their auto-enrolment responsibilities.
So, the statistics simply do not back up the inferred claim that there are 750,000 scam pension arrangements out there. Most of the 800,000 schemes referred to in the consultation paper must have been in existence prior to April 2006 and this would indicate that perhaps they are insured Executive Pension Plans, (some of which were marketed at the time as 'deferred SSASs').
If you assume that the 4,000 or so schemes registered and approved in 2015/16 represent the true level of bona fide new schemes in the UK, then you might conclude that there were about 23,000 sham schemes set up in 2012/13 and 2013/14, or roughly 1,000 a month. There is no useful data, but setting up 1,000 scam arrangements a month is broadly consistent with my expected volume of scams taking place using SIPP arrangements during 2010/11.
There might be some other schemes set up before or after that period – crucially I would say in the year or so after 6 April 2006 – and so perhaps there are 35,000 to 50,000 suspect SSASs. My view is that this is an over-estimate, though I may be wrong.
If SSASs are no longer being used, is there no longer a concern about pension scams?
The reward for scammers is so high, that when one route closes another avenue is selected. We experienced this when there was a switch from SIPP to SSAS around 2012. Things have moved on again.
Transfers to overseas schemes is seen as a weak point and we suspect is being exposed. There are very few circumstances where a UK resident needs to transfer their fund overseas whilst they remain resident in the UK.
We also have concerns regarding slightly larger occupational pension schemes that can receive transfers for many more consumers and perhaps look more legitimate than newly formed SSASs. These are schemes that can have no more than 99 members at any one time, in order to gain some exemptions from some member (i.e. consumer) protections.
A scheme of this nature should be subject to higher regulatory scrutiny as not all members are trustees. I would describe these sorts of schemes, rather than SSASs, as the 'pension vehicle of choice' as it is a far easier scam route than a SSAS because:
a) the same scheme can be used over and over again; thereby avoiding the need to go through HMRC’s new scheme registration process;
b) the member does not have to be a trustee and so there is less paperwork required for them to sign; and
c) the industry has been alert to use of SSASs for pension scams for some time now, but may be more receptive to a transfer request to an established scheme.
Deleting these exemptions would serve to increase the costs of running such schemes. Those costs are often met by the members directly from their funds or indirectly if paid by the business which they own. These additional running costs, such as the need for audited accounts and annual projections for members, are easily ignored by scammers. The end result would be additional costs for legitimate schemes and illegitimate schemes appearing better value for money, and little impact on those that are using the non-SSAS occupational pension schemes for nefarious purposes either.
The claim by Mr Warwick-Thompson that a SIPP is a safer vehicle for consumers who want control over the investment of their pension pot is true to some extent in that now most SIPP providers only allow vanilla investment options and most consumers are not business owners. However, this discounts that many business owners would prefer to make use of SSAS, as a SSAS provides even more control, even more investment choice by legislation, and even more investment choice in practice than SIPPs by the very nature of a SSAS being a pension vehicle set up by - and specifically for - that set of members.
On balance, I would have expected more insightful comments from Mr Warwick-Thompson rather than continuing the outdated dialogue that SSASs are used for scams and that they need to be outlawed.
Considerable weight is likely to be given to his comments and setting out the position from three years ago means there is the danger that changes will be brought in under the false impression that they will deal with the problem now, leaving the scammers the easy option of carrying on with business as usual.
A more useful reaction in my mind would be to consider what action the Pensions Regulator can do, of its own volition, to tackle sham arrangements. The DWP consultation paper proposed a levy reduction for larger schemes (which I support) which illustrated that the current levy basis would generate a surplus of £13 million at the end of 2016/17. Given the consensus on the need to tackle pension scams, I would have therefore taken the opportunity to use part of the surplus to tackle pension scams.
- Volunteer as the lead body that will monitor trends in pension scams with the aim of staying ahead of the scammers;
- Put in place plans to ensure The Pensions Regulator has data on all occupational (and indeed non-occupational ) pension schemes in the UK, including working with Government and HMRC so that there is information-sharing, regarding the number and type of pension schemes;
- Closely monitor occupational pension schemes in their first three years of existence, to include all small schemes, not just those with fewer than 12 members;
- Increase the regulatory oversight for schemes with up to 99 members, to include taking meaningful action where there are breaches; such as failing to comply with legislative requirements designed to protect member’s interests; and
- Lobby Government to change the exemptions that apply for schemes with up to 99 members, such that they only apply where the total number of members during a rolling twelve month period does not exceed 99 (rather than at the scheme year-end).
Barnett Waddingham is one of the largest providers of SSASs and so we obviously have an opinion and we are very interested in the outcome of the consultation. Our prime concern would be to protect the rights of existing members of SSASs, though we also believe that business owners should be able to exercise choice and not be limited to increasingly-restricted SIPPs if wanting to support their business whilst saving for retirement.
It is hard to support Mr Warwick-Thompson’s statements as essentially we think his opinion is based on outdated or incorrect information.
Our experience, backed by the HMRC statistics, is that there have been far fewer instances of SSAS used as a pension vehicle for scammers than certain commentators would have you believe and, more importantly, focus should be now directed at regulatory oversight for the current pension vehicle(s) of choice, rather than SSASs.