Cold call ban won't end pension freedom dangers

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The ban covers unsolicited calls, texts and emails, and could see violating companies hit by the Information Commissioner's Office with a fine of up to £500,000.

In addition, the Government will deter pension fraudsters by strengthening the conditions that need to be satisfied in order to set up a pensions scheme, as well as by making it more difficult to transfer pension money from one pot to another.

However, as timely as the measures may be, they don't address the dangers surrounding the Government's flagship pension freedoms, which have seen growing numbers of people withdraw their funds and often reinvest them without obtaining any financial advice.

The problem

According to the Government, the need for protective measures was underlined by new data showing that around £5 million was lost to pension fraudsters in the first half of 2017 alone.

They also note that since April 2014 - when the pension freedoms were first announced by then-Chancellor George Osborne - fraudsters had illicitly gained £43 million, at an average cost of £15,000 per pension holder.

While they don't explicitly state this, the implication is that matters have deteriorated since the arrival of pension freedoms, and that something has to be done to reverse the trend.

For this reason, the Department for Work and Pensions and the Treasury are proposing a selection of new measures, all intended to make it less likely that pension holders will end up losing their savings to con artists.

As mentioned above, these include the following:

• a ban on cold calling, texting and emailing in relation to pensions, with offending firms liable for a fine of up to £500,000
• rules legislating that only active companies producing regular accounts will be able to register pension schemes
• a stipulation that receiving schemes must be regulated by the Financial Conduct Authority, or must have some current employment link with the pension holder, or be an accredited master trust

Commenting on these proposals, the Economic Secretary to the Treasury, Stephen Barclay, said, "Pensions are often the most valuable asset a person has upon reaching retirement - and that's why we are determined to crack down on scammers and protect our hardworking savers

Companies and directors

Nonetheless, as well meaning as the new measures may be, there's no guarantee they'll "crack down on scammers".

For one, as we've noted with regards to nuisance calls more generally, the ability to fine companies for cold calling isn't especially effective, particularly when the directors of guilty companies can simply establish a new company after liquidating a previous one.

As such, the ban on cold calling may not make much of a difference, since the people responsible for fraudulent companies can often move on without suffering any comeuppance for their fraudulence.

This is one way the measures may prove ineffectual, yet another concerns the two intended to make it harder for pension pots to be moved to a new pension scheme.

For example, while the new measures will potentially reduce the number of "pension liberation scams" that have recently defrauded pension holders of as much as £12o million of their retirement savings in recent years, the FCA have recently noted that pension scheme operators are also increasingly being taken in by a range of investment "products designed to defeat firms' due diligence efforts".

In other words, rather than simply transferring money to another scheme - which will soon be subject to stricter controls - pension funds may still go to fraudulent non-pension investments or savings, and people may still end up losing money.

That this is a possibility is highlighted by how, in a July report from the FCA, it was observed that 52% of pots fully withdrawn using the pension freedoms "were not spent but were moved into other savings or investments. Some of this is due to a lack of public trust in pensions."

No advice

Yet perhaps the most important point to make about the new measures is that, while they may hinder pension scheme scams, they entirely miss one of the main dangers surrounding pension freedoms.

They do nothing to tackle the fact that many people are confused by the rules attached to the pension freedoms, and that increasing numbers are withdrawing all or significant chunks of their pension pots early without taking financial advice.

For instance, according to the aforementioned July FCA study, before the pension freedoms were introduced in April 2015, only 5% of drawdowns were taken without financial advice, yet now this has increased to 30%.

Because of this, even if the Government reduce instances of fraud to something close to zero, the pension freedoms and the lack of financial education in certain segments of the population will mean that some people will continue making rash decisions, and may end up worse off as a result.