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July pensions supplement: are pensioners easy prey?

Interview with a pensions regulator, Andrew Warwick-Thompson

By Jay Elwes  

Read the rest of our July pensions supplement

“We need to make sure that pensions schemes are not set up by criminals,” said Andrew Warwick-Thompson, Executive Director for Defined Contribution Pensions at the Pensions Regulator.

“We need to address as a regulator, and with other government agencies and other regulators and the police force, the scourge of scams.”

Warwick-Thompson’s comments to Prospect get to the heart of a problem faced by the pensions industry. The government has given pensioners more freedom to do what they like with their pensions savings. Pensioners will now be able to withdraw their pensions savings on retirement, and having paid tax, do what they want with the money. They no longer need to spend their pension savings on an annuity: an insurance product that drip-feeds a steady but normally fairly low income throughout retirement. A further recent change is that, in future, pensioners who have already bought annuities will be able to sell them.

The freedom that pensioners have when it comes to their retirement savings has increased enormously—but so too has the scope for poor decisions. Savers will find themselves able to access large amounts of cash, and the investment options open to them will be substantial and varied, and many pensioners will be new to this sort of investment decision-making. Though the former annuity-based pension system was boring and offered measly returns, it had the benefit of being simple and safe. The new system will be more complex and bring increased risks. Pensioners will make mistakes—they will also be easy prey.

“We have seen a significant increase in the use of pension schemes for the purposes of the misappropriation of people’s pension savings,” said Warwick-Thompson. “As regulators and other agencies have borne down on certain types of activity, the scammers have shifted into other areas.”

“So most of the scams now are investment related—they may or may not be part of pensions. One of the developments that we are seeing is that people are being told they can take their money out of their pension scheme for a fantastic investment return over here in palm oil futures in Vietnam, or something like that. We are seeing what was predominantly scam activity around bogus pension schemes morphing into something which is just investments in bogus, non-existent investment schemes.”

Regulators have responded to these new risks with a campaign called “Scorpion,” which is aimed at pension trustees, advisors and also consumers. The aim is to encourage vigilance and to communicate a simple warning to consumers: “If you are approached by people who cold call you or come and knock at your door or text you,” said Warwick-Thompson, “that isn’t the behaviour of reputable pension schemes or reputable investment advisors. You should just hang up.”

The investment-related scams that often operate outside pension schemes are at least as important if not more important than those that operate within the pensions system. They are a greater risk in the current environment because more members of the public than ever before will have access to large amounts of cash and will be in search of suitable places to invest.

“There is always the risk that if you give people freedom and choice, they will make bad decisions or bad choices,” said Warwick-Thompson. “People have always made bad investment decisions. We see people selling out at the bottom of the market and buying in at the top of the market.

“There is a lot of bad behavioural behaviour in investment markets all around the world. Even among professional investors herd instinct is a terrible thing.”

He pointed to another deep problem facing the industry: that of pensioners making investments in bona fide schemes that do not give adequate returns. This has the potential to cause large problems for the advisors and financial institutions that provide pensioners with information and guidance. The problematic question will arise when a pensioner claims that he or she was encouraged to invest in a product that was not appropriate—whose fault will that be?

The government has reassured the market that advice services will guide pensioners in their investment decisions. But no amount of guidance or advice—the two are distinct—will prevent investors from making mistakes and, when that happens, the market risks becoming mired in disputes over both advice and products.

The danger is that these new rules, and the complications arising from them, could make the pensions industry less appealing. As Warwick-Thompson put it: “We will end up with a market which is so cautious and is so concerned with protecting its own tail risk that we actually get in the way of people being able to exercise the freedom of choice that the policymakers intended them to have in the first place.”

It would be a bitter irony if the new rules ended up curtailing the very freedoms they were intended to enhance.

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