Pensions briefing. Pension liberation Pensions Ombudsman decisions and online guidance. Briefing. Introduction

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1 Financial institutions Energy Infrastructure, mining and commodities Transport Technology and innovation Life sciences and healthcare Pensions briefing Pension liberation Pensions Ombudsman decisions and online guidance Briefing May 2015 Introduction Pension liberation, the unauthorised use of transferred benefits, is currently a high-profile issue for the pensions industry. Pension liberation schemes are generally used to provide members who are below normal minimum pension age with access to their benefits. Although this is not illegal, it is likely that the member will be liable for a large tax charge on what would be an unauthorised payment (possibly up to 55 per cent of the transferred benefits). The Pensions Regulator has also warned that it is likely that these liberation schemes will adapt to take advantage of the pension flexibilities now available to members over normal minimum pension age. Pension liberation schemes normally operate by a third party (the liberator) persuading a member of a registered pension scheme to transfer his benefits into another scheme. The receiving scheme appears legitimate, but is often a sham. The liberator usually keeps a large proportion of the transferred benefits as commission (reported as being between 20 and 30 per cent). The rest of the member s benefits are invested in risky assets or, in some cases, are stolen by the liberator. The amount of commission, the risks of the investments and the potential tax charges are often not fully explained to the member before the transfer. There have been several recent regulatory reforms to combat pension liberation.

2 Pensions New powers for HMRC Amendments have been made to the Finance Act 2004 to give HM Revenue & Customs (HMRC) new powers to refuse to register or to de-register a scheme which it suspects of being a pension liberation scheme. In summary: HMRC can now refuse to register or de-register a scheme if it believes that the scheme has not been established, or is not being maintained, wholly or mainly for the purpose of providing the benefits authorised under the Finance Act 2004; HMRC can refuse to register or de-register a scheme if the scheme administrator has failed to comply with an information notice or has deliberately obstructed HMRC in the course of an inspection. HMRC s new powers include the ability to require administrators and others to provide information which HMRC reasonably requires to decide whether or not a scheme should be registered, and to visit business premises to inspect documents; and HMRC can also refuse to register or de-register a scheme if it considers that the scheme administrator is not a fit and proper person and has published guidance including a nonexhaustive list of characteristics which may indicate that an administrator is unsuitable. The guidance states that administrators will be considered fit and proper if they are familiar with, and capable of competently performing, the scheme administrator s responsibilities and there is nothing in their past behaviour to suggest that they should not be responsible for the financial management of the pension scheme. The Pensions Regulator s Scorpion guidance The Pensions Regulator (TPR) updated its Scorpion guidance on pension liberation in March The guidance for trustees contains a checklist of enquiries about a receiving scheme and to assess the risk of pension liberation. The guidance emphasises that answering yes to one of questions in the checklist does not necessarily mean that the receiving scheme is a pension liberation scheme, but it states that if several features are present there may be cause for concern. The guidance also lists some warning signs of pension liberation: for example where a member is cold-called by someone who talks about a free pension review, one-off investment opportunity or legal loophole, or where a member is promised returns of over eight per cent on any investment, there is reason to be cautious. 02 Norton Rose Fulbright May 2015

3 Pension liberation Pensions Ombudsman decisions and online guidance Code of Good Practice In March 2015, an industry working group published a new Code of Good Practice in relation to pension liberation. The Code is voluntary and non-statutory, and sets out industry standard due diligence which should be used by trustees, administrators and providers when assessing the risk of pension liberation in relation to a member s transfer request. The Code is based on three principles: trustees, administrators and providers should raise awareness of pension scams for members; they should have robust but proportionate processes for assessing whether a receiving scheme may be operating as part of a pension scam, and for responding to that risk ; and they should generally be aware of the known current strategies of the perpetrators of pension scams. Recent Pensions Ombudsman decisions There have been a number of recent Pensions Ombudsman decisions concerning pension liberation. All except one of these cases were brought by members against providers who had refused to transfer their benefits because of concerns about pension liberation. Mrs Jerrard (PO-3809) Mrs Jerrard requested a transfer from her personal pension scheme to a suspected pension liberation scheme (the Scheme). Her provider noticed a number of warning signs relating to pension liberation, and therefore refused to make the transfer Mrs Jerrard complained to the Ombudsman. The Ombudsman first looked at whether Mrs Jerrard had a right to a transfer under the scheme rules. On the face of it, she did have this right, but there were two overriding provisions in the scheme rules. Firstly, the provider was required to act in the best interests of the beneficiaries (although the Ombudsman noted that this type of rule could only override a member s contractual right in limited circumstances). In addition, there was no right to an unauthorised payment, and a transfer to the Scheme would have been unauthorised, because Mrs Jerrard was not a member of the Scheme under its own terms. The Ombudsman then looked at Mrs Jerrard s statutory right to transfer and decided that the Scheme did not satisfy the legal definition of occupational pension scheme, on the additional statutory requirements for the payment of a cash equivalent transfer value. Under legislation, Mrs Jerrard s request for a cash equivalent transfer value had to require the trustees to use the cash equivalent for acquiring transfer credits allowed under the rules of another occupational pension scheme. Transfer credits are defined as rights allowed to an earner under the rules of an occupational pension scheme and an earner means a person receiving any remuneration or profit deriving from an employment. Mrs Jerrard was not allowed rights under the Scheme, because she was not a member of the Scheme under its own terms. She was also not an earner, because she was employed by a company unrelated to the Scheme and the Ombudsman decided that a member s status as an earner had to be in relation to a scheme employer. Norton Rose Fulbright May

4 Pensions However, although the Ombudsman found in favour of the provider, he criticised the approach they had taken. He accepted that the provider was in an extremely difficult position, but said that once [the provider] had followed all the relevant steps, the individual s right to make what might be a life-changing mistake must take supremacy over [the provider s] obligation to help them not to. Mr Stobie (PO-3105) This case, with similar facts to Mrs Jerrard s case, concerned a provider s refusal to transfer Mr Stobie s benefits, due to the fact that the provider was concerned that the receiving scheme might be a pension liberation vehicle. The Ombudsman decided that Mr Stobie did not have a statutory right to a transfer. The receiving scheme met the requirements for an occupational pension scheme, but as Mr Stobie had not received remuneration from the scheme employer, he was not an earner, and so his request for a cash equivalent transfer value was not for securing transfer credits. However, the provider s scheme rules allowed for transfers with the provider s agreement where there was no statutory right to a transfer. The Ombudsman found that the provider had not exercised this discretion reasonably, because they had not actually assessed what their legal and regulatory obligations were, before deciding not to agree to the transfer. The Ombudsman therefore directed the provider to consider paying a transfer value to the receiving scheme. If the provider decided to pay the transfer value, they should pay the higher of the current or backdated transfer value. The Ombudsman was critical of the provider for not following the next steps set out in TPR s guidance, and for apparently not considering whether or not Mr Stobie had a statutory right to a transfer. However, the Ombudsman also included a serious note of caution for Mr Stobie on the unorthodox step which he proposed to take by transferring his benefits. Mr Harrison (PO-3184) In another case on similar facts, Mr Harrison asked his provider to transfer his benefits to the Cheshire Food Services Pension (the Scheme). The provider refused because their due diligence highlighted some pension liberation concerns. The Ombudsman found that Mr Harrison did not have a statutory right to a transfer. The Scheme was an occupational pension scheme but Mr Harrison had not received any remuneration from an employer connected to the Scheme. He was therefore not an earner, and so his request for a transfer value was not for securing transfer credits. However, the Ombudsman decided that Mr Harrison had a right under the transferring scheme s rules to transfer his benefits to a registered pension scheme, and the Scheme was registered with HMRC. The Ombudsman therefore directed the provider to pay the higher of the current or backdated transfer value. 04 Norton Rose Fulbright May 2015

5 Pension liberation Pensions Ombudsman decisions and online guidance Mr Winning (PO-5799/ PO-5930) Unlike the cases discussed above, Mr Winning s two cases concern claims brought against providers for not carrying out sufficient checks on a receiving scheme before transferring benefits. Mr Winning had transferred his benefits to the Capita Oak Pension Scheme (Capita Oak), a suspected pension liberation scheme. When he subsequently had difficulties contacting the trustee of Capita Oak, he became concerned about his fund. He brought two separate claims against each of his former providers, arguing that they had failed to carry out adequate due diligence on Capita Oak before they transferred his benefits, and that they should pay him the transfer values as redress. Despite having great sympathy for Mr Winning, the Ombudsman did not uphold his complaint. The Ombudsman found that Mr Winning had a statutory right to a transfer, and that this would have overridden any duty of care which the providers owed him. Given that the transfer happened before TPR had published any guidance on pension liberation, the Ombudsman held that he could not apply to past events current levels of understanding and standards of practice. Conclusion The Ombudsman has clearly set out the process which the providers in these cases should have followed when considering a member s transfer request. He has also emphasised that if a member has a contractual or statutory right to transfer his benefits, this right cannot be overridden by non-statutory guidance or concerns that the member may be making a mistake. Although these cases involved providers rather than trustees, it is likely that the same process will be helpful for trustees in assessing whether or not to make a transfer. The case of Mr Winning is less directly relevant to trustees and providers, given that one of the reasons for the Ombudsman s decision was the fact that, at the time of the transfer, there was much less awareness of and regulatory guidance on, pension liberation. Trustees and providers would now be expected to draw members attention to the risks of pension liberation, using the steps set out in TPR s guidance and the industry Code of Good Practice. Administrators could be forgiven for feeling that they are damned if they do and damned if they don t from these recent determinations in this topical area. The decisions emphasise the paramount importance for pension providers of undertaking a proper analysis to establish the member s legal rights when a transfer request is received. Administrators must also have clear procedures in place to try to identify suspect transfers and to enable a decision to be taken when such questionable requests are received. TPR s guidance sets out points of good practice which trustees will find useful, although both it and the Code are voluntary and do not replace or override statutory requirements. Trustees are under a fiduciary duty to act in members best interests and will be concerned about potential transfers to fraudulent arrangements, in addition to incurring tax charges for their schemes. They should therefore ensure they are aware of the issues, use the TPR online training and highlight the potential pitfalls to members in their regular communications. Norton Rose Fulbright May

6 Pensions Contacts If you would like further information please contact: Peter Ford Partner Norton Rose Fulbright LLP Tel Lesley Browning Partner Norton Rose Fulbright LLP Tel Norton Rose Fulbright May 2015

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