Fraud can have one of the most serious impacts in respect of pension funds. Pension funds can be undermined, denying millions of individuals the financial security they need for later life, despite their diligent preparations. It is not a minor issue which we can hope does not affect us, or which we are only prepared to react to after it does. Fraud is present in all organisations of any size – detected or undetected – and we all need to understand its nature and scale and how it is best addressed.
Fraud is immoral, unethical and sometimes shown to be unlawful, but even worse, it is a cost and this is where the greatest damage lies. Over the last 20 years, major changes have taken place concerning our approach to fraud. Rather than reacting after the event (where losses have already been incurred) with an investigation into what happened and possible prosecution or litigation, the modern, now widely adopted, approach is to protect yourself and pre-empt fraud to minimise its cost. The total cost of fraud can now be measured to high levels of accuracy, just like any other business cost and in some countries and sectors this is a requirement.
Crowe UK, together with the Centre for Counter Fraud Studies at the University of Portsmouth (Europe’s premier research institute concerning fraud), have undertaken the most extensive research (now over 19 years) into what that cost is. Currently losses average 5.85% of expenditure, an increase of over 40% since 2007. That percentage loss rate is for the first time, increasing during a period of economic growth. The better news is that, as a result of loss measurement and reduction techniques that have been introduced over the last two decades, it has been shown that this cost can be reduced by up to 40% within 12 months, where organisations improve their protection against fraud (their 'fraud resilience').
Research has also shown that the nature of fraud is not the same as we used to think and the obvious responses are not the most effective ones. Most fraud cost is high volume and low value (i.e. not like the infamous cases involving Enron or Bernard Madoff), making it hard to detect, with even the well protected organisations only detecting as little as 1/30 of the total cost. Furthermore, the police response has weakened dramatically over the last 20 years. The number of specialist officers has been cut and only one police force (City of London) has fraud as a priority. In 2013, the year that figures were last researched, only 0.4% of fraud cases in the UK were successfully prosecuted.
It is against this background that pension funds are being increasingly impacted. Pension liberation fraud, where fraudsters claim that members can access their pension pot before age 55, approach them out of the blue and entice them with upfront cash, offer a free 'pension review' or try to lure them in with one-off investment opportunities. In the first few months after the introduction of pension freedoms, City of London police reported that losses from such scams more than doubled. The existence of some 'pensioners' is also an issue. The Annual Fraud Indicator for 2016 estimated that 3.9% of pension payments are lost in this way. Other areas of potential fraud include investment frauds, identity theft, unlawful access to member records and the penetration of pensions funds' IT systems.
However, despite a growing – and increasingly diverse – threat, it is possible to protect yourself against fraud. Crowe UK's Forensic and Counter Fraud Services team have many years of professional experience in this area, working in different sectors and different countries, countering the latest manifestations of fraud and working to protect clients. Effective counter fraud work does not just help clients after something has gone wrong, but helps them to minimise the chances of this happening.
In increasingly risky times there is no substitute for the right professional skills to light the way. If you would like to discuss the fraud resilience of your pension scheme, please contact Jim Gee, Head of Forensic and Counter Fraud Services. Or for any other pension scheme issue, please contact Andrew Penketh, Head of Pension Funds.