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SSAS Safeguards: A Stronger Defence

Whilst safeguards can be put in place to protect individuals and entities from fraud, sadly there will always be those who are greedy and unscrupulous who will seek ways to exploit any weaknesses for their own financial gain. As one exploited weakness is shored up, so the perpetrators will seek out other weaknesses to exploit. That is the way it is. However, that is not an argument to abandon the battle to put new protections in place to tackle each subsequent attack.

As a pension fund can often be an individual’s largest financial asset, it is no wonder that fraudsters seek out weaknesses in the pension system. Ever changing pensions legislation does not help in the fight against fraud either. One case in point is the introduction of pension freedoms in April 2015, specifically the lifting of restrictions on pension fund withdrawals, which allow individuals who have attained age 55 to take as much of their pension pot as they like. This change scuppered the scammers ploy of tempting individuals to transfer their pension fund to an alternative pension scheme that purportedly could ‘unlock’ their pension fund for them in return for a hefty fee. Somewhat ironically though, the freedoms that have given individuals access to their pension funds have allowed scammers to target those over the age of 55, enticing them to withdraw their funds for investment into, for example, a high risk, unregulated, complex and expensive investment proposition, completely bypassing the need to set up and transfer into an alternative pension scheme. Of course the false promise of ‘unlocking’ pensions prior to age 55 is also a tactic that can be deployed to entice the unwary below that age but the opportunities for the scammers are significantly less.

Despite pension freedoms offering an easy route for fraudsters to get hold of pension funds, concerns are still being expressed about small self-administered schemes being used as a vehicle for scamming. This has historically stemmed from the ease at which a company can be established and, in turn, for it to establish an occupational pension scheme, register the scheme with HM Revenue & Customs, appoint the employer company as the Scheme Administrator and for the member, who is a Director of the employer company, to be the sole Trustee for the scheme thus giving them total control over their pension fund. This raises an opportunity for scammers to entice the SSAS member to invest in high risk, unregulated investments or liberate funds to avoid tax.

This has manifested itself in some transferring pension schemes being highly suspicious of all transfer requests where the receiving scheme is a SSAS, regardless of the entities involved in the SSAS. Part of the problem lies in the variety of ways SSASs can be structured even though HM Revenue & Customs latterly raised the bar, by requiring a signed declaration that scheme administration would be carried out by a ‘fit and proper person’, when schemes are registered. By way of contrast, established professional SSAS providers follow a model where they are the scheme administrator and an independent trustee alongside the member trustees.

These scheme governance mechanisms are fortified further, if a provider also has sole control over the SSAS bank account through which all payments into or out of the scheme must pass. In addition, if a provider’s procedures for due diligence and acceptability of investments for SSAS sit alongside the robust process used for SIPPs, this adds up to a model that cannot be readily used by scammers but at the same time allows a high degree of flexibility over where the SSAS funds can be invested.

To tackle the continued concerns about SSASs, the idea of making this model even more resilient to scammers, by introducing a requirement for a recognised professional scheme administrator to be appointed for all SSASs, seems to be well supported by the industry. It is therefore a shame that the Government’s response to its pensions scams consultation does not take this approach. Instead more complexity is on the cards with proposals to introduce a requirement for evidence of employment before transferring and new powers for HM Revenue & Customs to refuse registration or indeed to deregister schemes where the employer company is deemed to be dormant.

Unfortunately, neither a scheme member’s lack of earnings, nor a company’s lack of trading activity is a definitive test of a scam. Therefore the precise wording of the new requirements will be critical if they are to avoid impacting legitimate users of SSASs. The probability is that precise requirements will simply give the scammers a bench mark they need to exceed that could be exploited. The solution still seems to be to turn Small Self-Administered Schemes in to Professionally Administered Small Schemes – perhaps one day it will come to PASS.

This article was first published in Investment Life and Pensions Moneyfacts (October 2017)

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