I start this blog with a health warning. I am not a lawyer so trustees and others must take legal advice on this subject and any of these thoughts. I do write this as a trustee who is concerned that despite the High Court ruling on Monday 21 October 2013 and just as importantly, the decision by HMRC to tightened up the scheme registration process (horse, stable door, after, bolted – rearrange these words into a well-known phrase or saying), we are older but not a great deal wiser.
The question remains, what should the trustees policy be when faced with a potential pensions liberation transfer request?
Trustees remain caught between a rock and a hard place. The duty on trustees to make a transfer at the members request is still present. Where the trustee has not done what is needed to transfer within six months of the transfer value guarantee date, they need to tell the Pensions Regulator. In turn, the Pensions Regulator has the power to fine trustees up to £50,000 (in the case of a corporate trustee) if they believe the trustees have ‘’failed to take all such steps as are reasonable to ensure that it was so done’’. The fine would be on the basis that the trustees have not taken all such steps as are reasonable to enable the transfer to take place.
On the other hand, the member may take their complaint to the Pensions Ombudsman. To make trustees lives more complex, the white smoke suggests that they will find in favour of the member in not having had the transfer go ahead, but this is far from certain. There are cases with the Pensions Ombudsman awaiting their decision regarding delays and interestingly, one member who claims that the transfer should not have taken place. At this time (October 2013) the lack of understanding of the general view from the Pensions Ombudsman is not helping trustees formulate their policy. The risk for trustees remains that the Pension Ombudsman will rule that the transfer be paid and compensation for the member’s distress and inconvenience be made as well.
The High Court ruling on 21 October that the nine schemes tested are occupational pension schemes is only part of the answer trustees need. The second and as yet untested question is whether such schemes are shams with no intention of complying with the obligations which relate to authorised payments. If this were found to be the case then trustees would be able to refuse to make the transfer payment.
How should trustees respond to a potential pensions liberation transfer?
If trustees consider three concepts they have to balance when looking at such cases:
- Firstly, the degree of paternalism they feel to the members – how far can they go in making a member aware of the potential risks they run in making such a transfer?
- Secondly, how can they reduce if not avoid the different legal risks to making the transfer? These risks are in turn:
- If the receiving scheme is an occupational pension scheme, the Pensions Regulator will order repatriation of transfers to the scheme on an unfavourable basis
- If the receiving scheme is not found to be an occupational pension scheme, an unauthorised payments tax charge may arise. The nuclear scenario is the trustees having to pay the scheme benefit to the member having already paid out a transfer value
- If the Pensions Ombudsman orders a compensation payment for any investment loss suffered by non or late payment of the transfer
- The hopefully, much lower risk, that the Pensions Regulator imposes fines for missing the six month timescale for making the transfer, as long as the trustees concerns are clearly identified – the need for a proper audit trail is clear
- Thirdly, the potential reputational risk which is a mixture of 1 and 2 above.
On balance, if the trustees take the view that they will pay the members transfer request only it can be clearly demonstrated that the receiving pension scheme is not involved in pensions liberation, we believe that the risks are at least manageable at this time. This means ensuring that they ask for copies of
- trust deed and rules from the receiving scheme
- any deeds of adherence
- the members job description,
The trustees need to ensure the administrators obtain from HMRC confirmation that the receiving scheme remains a registered pension scheme and then getting an express discharge form from both the member and the receiving scheme that the member has no claim against the scheme in the event that the scheme is found to be involved in pensions liberation. To make this happen in practice requires the trustees and the administrators to be quite clear of what is expected of each other.
It’s almost certain that this process will take more than six months to complete. I repeat, the trustees will need to ensure that they have a proper audit trail, including communications with the member and the Pensions Regulator, in order that they can demonstrate due diligence.
CBC believes that the law should be changed to allow trustees should have the right to refuse to make transfers where they suspect pensions liberation fraud trustees. We also would like the Pensions Ombudsman not to rule against trustees fulfilling their statutory duties to ensure the validity of the ensuring scheme. We are, however, not holding our breath.
This is a far from perfect place for pension scheme trustees to be in and we hope that the picture becomes clearer sooner rather than later.
Trustees need to engage with their legal advisers and administrators, and quickly.