By Ben Fairhead, Senior Associate, and Lindsay Watkins, Solicitor, at Pinsent Masons
This year's main focus, the recent Pensions Ombudsman determinations, has been on situations where the scorpion has already hatched but where providers have arguably been trying to help members avoid the scorpion's sting.
Changes to legislation
March 2014 brought about some critical Budget changes, formalising the more restrictive approach to registration of new schemes that had been introduced by HMRC in October 2013 and introducing some additional powers in relation to checks on scheme administrators. As such, HMRC became able to refuse to register a pension scheme, or could de-register an existing scheme, if the main purpose of the scheme was not to provide authorised payments.
These powers were unexpectedly wide in scope, enabling HMRC to rely upon such factors as
a proposed investment being considered unsuitable for the scheme membership. This ought to have been very helpful for HMRC given it is not always easy to spot the prospect of pension liberation occurring. However, all the signs are that trustees/providers are still having to contend with numerous suspicious transfer requests.
Pensions scams campaign
In July 2014, the Pensions Regulator refreshed and effectively rebranded its "scorpion campaign": gone was "liberation" and in came "scams" – thus attempting to address one of the pitfalls of the Budget changes, which, with frequent references to the "liberalisation" of pensions, were in danger of suddenly making pension "liberation" sound legitimate.
Pensions Ombudsman determinations
The biggest development in the past 12 months has been the publication of three determinations by the Pensions Ombudsman on 9 January 2015. These all concerned complaints against providers who blocked transfers from personal pension schemes to occupational pension schemes registered with HMRC on the grounds of suspecting that the intended recipient schemes were being used for pension liberation.
It soon became apparent from reading these determinations why there had been such a long delay in publishing them – and, moreover, why the Ombudsman was only producing three initially notwithstanding having something like another 80 to consider.
This was because the Ombudsman in each of the three cases put to one side the reasoning deployed by each of the providers to justify the refusal to transfer, that reasoning in broad terms being based upon their concerns about the use of the receiving schemes for pension liberation purposes. Instead, he went through the more laborious process of looking for a technical, legal basis to justify the providers' refusal to allow the relevant transfers to proceed.
Accordingly, the Ombudsman reviewed the scheme documentation for each of the receiving schemes and concluded that the schemes in two cases did not constitute occupational pension schemes for the purposes of the Pension Schemes Act 1993. In addition, in all three cases, the Ombudsman held that the members could not be "earners" for the purposes of the legislative test governing the statutory right to a cash equivalent transfer value.
The upshot of this has been (broadly) to support the decision in each case not to effect the transfer but on the basis of reasoning very different from that put forward by the providers.
This gives rise to at least two potential problems:
First, for those who wish to adhere carefully to the Ombudsman's approach, it creates a burden on providers to review scheme documentation for a prospective receiving scheme and/or to seek legal advice potentially every time there is any question of legitimacy of a transfer it is asked to make.
Secondly, we are yet to see how the Ombudsman applies this approach to complaints by members whose transfers did go ahead but who have subsequently lost all or part of their pensions. In theory, if he has found that there was no statutory right to a transfer into schemes where transfers were indeed blocked, it seems probable that there will be at least some instances where transfers have been made into schemes where the same analysis should apply. This could have repercussions for providers.
Further developments on the horizon
So where do those tasked with making transfers go from here?
The fact remains that there is a need to balance risks: the risk of a complaint to the Ombudsman is only part of that assessment, which also needs to take account of the prospect of action by HMRC and/or by a "scammed" member if a transfer proceeds and a pension falls victim to fraud.
The forthcoming industry code of practice will also aid those faced with the dilemma of difficult transfer requests - publication is imminent.
Most intriguingly, the Ombudsman has indicated that the first determination of a complaint by a member whose transfer did go ahead is likely in the summer this year – and, without prejudging the outcome, it may be that, come Valentines Day next year, we will be talking about whether there is an antidote for those who have been stung by the scorpion.
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