Stealing for the Present While Saving for the Future: Pension Fraud

September 2013

IN THIS ISSUE

— Scheme a Little Scheme: Types of Pension Fraud
— Warning Signs: How to Detect Pension Fraud

GREETINGS!

Welcome to the September edition of our newsletter! In this issue, we’ll examine methods of committing pension fraud, and recommend some tactics your firm can undertake to detect and prevent it.

SCHEME A LITTLE SCHEME: TYPES OF PENSION FRAUD

A pension plan, which can include defined benefit plans and other forms, is a useful tool for both employers (for whom matching contributions are typically tax-deductible) and employees (who also get a tax deduction and build retirement savings.) Yet such plans can also be abused, as recent details from the bankruptcy of Detroit, Michigan — where city officials issued an “extra” 13th check, in addition to the mandated monthly pension payments — demonstrate. The extra check scheme is estimated to have cost the now-bankrupt city more than $1.9 billion over a period of 23 years. In its bankruptcy petition, the city said its largest single liability was an unfunded pension liability of $3.5 billion.

Pension fraud can occur in multiple forms: contributions exceeding the stated limits for each plan, excessive loans to plan participants (most plan types cap loans at 50 percent of the assets held), or working with the plan administrator (often a third party, not an employer or their agents) to create phony expenses against the plan which are actually paid to the scheme participants.

WARNING SIGNS: HOW TO DETECT PENSION FRAUD

Most pension plans are required to file a Form 5500 return with the U.S. Internal Revenue Service (which developed the form with the U.S. Labor Department.) Structured much like a business tax return, the form discloses the number of participants, plan assets at the beginning and end of the year, as well as the aggregate amount of loans taken out by participants against their plan investments. If the loan figures or the plan expenses (also reported, again in an aggregate amount) seem unusually large relative to the plan assets — or if plan asset balances fluctuate greatly between the beginning and end of a year (without a known cause, such as widespread layoffs) — these may be indicators of pension fraud.

Companies of all sizes often have some measure of pension plan, a four-person plan for a dental office can be just as susceptible as a Fortune 500 company. If a routine review of the plan financials (such as when preparing the Form 5500, typically authorized by a chief financial officer or equivalent executive) uncovers indicators of irregularities, it is best to bring in a qualified fraud examiner to assist in identifying the patterns necessary to determine who perpetrated the fraud and how best to prevent it in the future.