Pensions Ombudsman Focus September Edition

Transcription

1 September 2017 September Edition In this issue: Welcome Welcome to the for the period to September In this edition, we cover three recent complaints to the Pensions Ombudsman. The first two cases relate to issues surrounding pension transfers. The first of these cases deals with a pension scheme being found liable for a significant unauthorised payment charge due to a lack of sufficient due diligence. The second case found a scheme not liable for a member s loss after the scheme transferred his pension to, what was later discovered to be, a fraudulent pension scheme. Both cases are notable for comments made by the Pension Ombudsman about changing industry standards due to pensions liberation fraud and the growing need to properly warn members of transfer risks. The final case deals with a member s claim that he had a contractual right to an uplift on a transferred-in pension. Please do not hesitate to get in touch if you would like to discuss any of these determinations and how they might affect you or indeed any other contentious issues on which the Linklaters Pension Dispute Resolution Group may be able to assist. 01

2 Commentary Mrs N v Friends Life Limited Friends Life should have been a lot more thorough with their due diligence. A thorough due diligence exercise should be undertaken prior to the transfer to a QROPS, especially if the scheme does not appear on the HMRC approved list. If not, a scheme may be ordered to pay the member s unauthorised payment charge. In October 2011 Mrs N contacted Friends Life requesting an overseas transfer. She had a letter of authority from Insignia Financial Services, an unregulated entity, which had an overseas scheme called Danica. Mrs N sought to transfer into the Danica scheme, which was accepted as a Qualifying Recognised Overseas Pension Schemes (QROPS) on HMRC s official list in May 2011, but subsequently removed from this list in June Nonetheless, in January 2012, Friends Life acted on her request and provided Mrs N with a transfer illustration. Friends Life said that, having confirmed that the Danica scheme was a QROPS on HMRC s list, they would implement the transfer. A transfer payment of 88, was paid to the Danica scheme in respect of Mrs N s benefits. One month later, Friends Life was notified of potential issues with the Danica scheme and Insignia Financial Services which resulted in HMRC classifying the transfer as an unauthorised payment. This meant that Mrs N was liable to a 55% tax charge, amounting to 49,000 plus interest. Mrs N complained to Friends Life, on the basis she thought the Danica scheme was a legitimate arrangement and she had complied with Friends Life s procedures to implement the transfer. Friends Life insisted that they had confirmed the QROPS number, and although they admitted that the Danica scheme was not on the list, they justified their actions by stating that (i) other schemes which were similarly named were on the list; and (ii) when the transfer took place, industry practice was not as stringent regarding overseas transfers. Furthermore, Friends Life complained that Mrs N had used a financial adviser which was not regulated and pointed to the abundance of warnings relating to the potential tax charge arising from unauthorised QROPS transfers. Dissatisfied with this response, Mrs N referred the case to the Pensions Ombudsman arguing that Friends Life should pay for the tax charge and costs relating to the case. The Ombudsman upheld Mrs N s complaint. First, he dismissed the argument that the status of the financial adviser had any bearing on the outcome of the case. Further, although he agreed with Friends Life that industry practice was less stringent when the transfer took place, that did not excuse Friends Life from the requirement to carry out sufficient due diligence of the QROPS list. Friends Life s policy meant they could only make a transfer to a scheme which was on HMRC s approved list. Since the Danica scheme was not, the Ombudsman decided that Friends Life should have been more thorough with its due diligence. It was held that if Friends Life was more thorough in their inquiries, they would have refused the transfer. Therefore, the Ombudsman directed Friends Life to pay the unauthorised member payment charge. Additionally, Friends Life was to pay 1,000 to Mrs N for the distress and inconvenience caused by their lack of due diligence. This case highlights the importance of scheme administrators conducting thorough due diligence when transferring to a QROPS. 02

3 Mr R v London Pension Fund Authority and Newham Council ( LPFA ) Although a scheme should carry out checks into suspected fraudulent schemes prior to granting a transfer request, the scheme is unlikely to be held liable for losses resulting from this transfer if the member was more likely than not to transfer his benefits in any case, regardless of any warnings they may receive. These warnings have not put a stop to people transferring their benefits into other pension liberation schemes and people continue to fall victim to this type of fraud. The warnings are therefore no guarantee that the transfer would have been halted. Mr R was a member of the Local Government Pension Scheme which was administered by LPFA. In 2010 and 2013, Mr R made two unsuccessful claims to receive his pension on grounds of ill-health. In February 2013, Mr R requested a transfer value quote from LPFA who confirmed a cash equivalent transfer value (CETV) of 62,800. Mr R subsequently signed the transfer request which was received by LPFA in March, alongside information from HMRC that the Gresham Scheme had been a registered pension scheme since December When the transfer completed in April 2013, it quickly became apparent Mr R had fallen victim to pension liberation fraud and had likely lost his entire pension. Subsequently, Mr R pursued a complaint unsuccessfully through LFPA s IDRP which reasoned that the Scheme had adhered to the relevant regulations in complying with Mr R s request. Mr R escalated his complaint to the Pensions Ombudsman s office. LPFA acknowledged its maladministration by not providing Mr R with the relevant warning materials at the time. However, it did not offer to refund Mr R the loss of his whole pension fund (as he had requested) because Mr R would have continued with the transfer in any event. The Ombudsman noted that Mr R s transfer was completed shortly after the Pensions Regulator s press release on pension liberation fraud, which signified the beginning of a change in practice surrounding pension liberation. The Ombudsman agreed that LFPA should have been aware of the Pensions Regulator s announcement and should have carried out stricter procedures in administrating Mr R s transfer such as putting the transfer on hold while it carried out further checks. Nonetheless, the Ombudsman noted that the decision to transfer was that of Mr R, and LFPA was obliged to transfer his benefits following his request. The Ombudsman found that Mr R would still have made a loss regardless of LFPA s maladministration. Mr R s behaviour was high risk from the outset as he was looking to switch from a guaranteed pension to an uncertain investment. The Ombudsman held it more likely than not that Mr R would have proceeded with the transfer and would have taken the risk, even if warnings had been properly issued. The Ombudsman declined Mr R s request to have LFPA refund the value of his pension. However, LFPA was ordered to pay Mr R 1,000 in respect of the significant distress and inconvenience he had suffered because of its maladministration. The determination turned on the Ombudsman s conclusion that the member would have proceeded with the transfer in any event. However, the decision highlights the need for pension schemes to provide adequate warnings to members to ensure they are protected from pensions liberation. Ensuring proper processes are in place is vital. The outcome of this case may have been very different if they member displayed a less enthusiastic approach to withdrawing his pension. 03

4 Mr Y v Trustees of the Halcrow Pension Scheme ( Trustees ), Halcrow Group Ltd ( Halcrow ), and CH2M Hill Europe Limited ( CH2M ) A statement confirming the increases applicable to transferred-in benefits did not amount to a contractual obligation. The scheme administrators were setting out details of current entitlements only which was implicitly subject to the rules of the scheme. The letter did not constitute a contract as it simply confirmed the transfer-in right that Mr Y had acquired under the Scheme at the time... There was no indication in the correspondence... that the transferred in assets were to be kept separate from the main Scheme assets. In 2002, Mr Y requested a transfer of benefits from a previous pension scheme to the Halcrow scheme, where he was an employee. The pension manager responded with a memorandum setting out the transfer value and added that if you leave before your normal retirement date, the added years part of any deferred pension would be increased at the rate of 6.5% per annum. This was reiterated in writing and on the telephone. Mr Y asked that the transfer be completed and purchased nine additional years of service. Following financial difficulties in 2016, Halcrow was acquired by CH2M. Due to ongoing scheme funding problems, all relevant parties agreed to a regulated apportionment arrangement (RAA). Part of this meant that the revaluation and indexation of members benefits in the new scheme would be reduced to statutory minimum levels. Members who did not agree to the transfer would be moved to the PPF. Mr Y agreed to the RAA transfer. However, he submitted that he had a contractual claim for his original transferin increases of 6.5% per annum through the existence of a contract which was not affected by the RAA. The Ombudsman decided that Mr Y had no contractual entitlement to retain the increase of 6.5% per annum. The Ombudsman did not agree that communications from the pension manager gave way to a contractual agreement. It only confirmed the rights that Mr Y had acquired under the scheme at that time. In accordance with the scheme rules, the Trustees were permitted to change the method of revaluation for his deferred benefits where sufficient notice was given. Mr Y also submitted that there had been misrepresentation by Halcrow (his employer). However, the Pensions Ombudsman rejected this claim too, stating correspondence was through the pension manager and was not written by the employer (despite being on Halcrow letterhead). The Ombudsman did not find that the letters therefore amounted to a promise of future benefits by the employer. The Ombudsman noted that had Mr Y entered the PPF, his transferred-in benefits would have been subject to the same reduction as his normal scheme benefits. The decision highlights the importance of being clear to members that communications are subject to the rules of the scheme. 04

5 Contacts Mark Blyth Partner, Pensions Dispute Resolution Group Tel: (+44) Madeleine Frost Tel: (+44) Geoff Egerton Tel: (+44) Sarah Opie Tel: (+44) Simon Borhan Associate Tel: (+44) _F/10.17