In a short first report on pension freedoms published earlier this week, the Work and Pensions Select Committee has said the Government should act now to ban pension cold calls.
According to the Committee, this should happen through the Financial Claims and Guidance Bill.
The move would also make people either take or expressly opt out of guidance before they can access their pension pot.
Rt Hon Frank Field MP, Chair of the Committee, said:
Every day that passes without a ban, people are being avoidably conned out of their life savings. There is no need to over complicate this: our proposal would see an enforceable ban in place by summer, closing at least one door on rafts of scammers at a stroke.
Low saver engagement and high financial value makes pensions rich pickings for scammers offering fantastical returns or seemingly clever advice. The strongest weapon in the armoury against this is good advice and guidance – people just aren’t taking it. Making guidance the default option combined with the ban on cold calling would be a simple but big step forward in consumer protection in the era of pension freedoms. The Government should use the Bill that has just arrived in the Commons to legislate to protect pensions now.
This is an important issue because pension savings are under threat from scams.
People being scammed out of their savings is nothing new but the risks have become more serious following pension freedoms which were introduced in 2015.
The ability to withdraw the entire value of a pension pot has attracted scammers to these often significant sums of money, which once withdrawn are outside of the regulated pensions framework and subject to fewer protections.
According to the Work and Pensions Select Committee, it is the combination of high financial value and low saver engagement that has made pensions a scammer’s “perfect storm”.
They say that archetypal inappropriate investments are high risk, highly illiquid (once money is invested it is very difficult to retrieve) and unregulated.
The Committee talked about examples including schemes to invest in “diamonds, overseas property developments, store pods, forestry and film”.
Estimates of the scale of scamming vary hugely but it is likely grossly underestimated by official reports and the full scale may not be apparent for many years.
The Committee said that the evolving kind of pension scam that falls short of fraud – pushing people toward “completely legal but totally inappropriate” investments – needs to be tackled, and the Government should take urgent action through the Financial Guidance and Claims Bill as a first step.
This could introduce a ban on pension cold calls, often the source of pension scams.
The Committee accepts that a ban on pension cold calls would not stop all pension scams, but it would contribute as a preventative measure.
From our perspective, banning pension cold calling also sends a strong message to consumers that any cold calls in respect of their pensions are from scammers.
The Committee has requested a new clause in the Bill requiring the Government to introduce a ban by June 2018 at the latest, but set the details by regulations, as will allow outstanding issues to be resolved without being tied to a lengthy parliamentary process. It will also mean the ban will be future proof: capable of being adapted as scams evolve.
They have also called for clause 5(2) of the Bill to be strengthened to create a “guidance by default” provision that ensures an individual either receives or expressly refuses guidance before being granted access to a pension pot. The details should be set out in Financial Conduct Authority rules, following public consultation.
The Committee says the Government should use its existing powers to place equivalent requirements on trust-based defined contribution pension schemes. Guidance by default would promote shopping around, better-informed decisions and protection against scams.
Here at Informed Choice we support both measures; introducing a ban on pension cold calls as soon as possible and the ‘guidance by default’ position, with appropriate opt-outs available.
On this guidance by default proposal, it’s important to balance the rights of individuals to make their own decisions about what is their own money.
When pension freedoms introduced the mandatory requirement to obtain regulated advice before transferring a defined benefit pension exceeding £30,000, this placed an expensive barrier in front of many individuals exercising their own rights and freedoms.
It seems like a necessary safeguard before individuals sign away their accumulated pension wealth, for what might in some cases be an inappropriate choice, but it would be good to see the authorities carry out some research on the effectiveness of such a rule.
