The Pensions Ombudsman has recently published a further three determinations relating to suspected pensions liberation fraud.
In each case, the complaints were brought by members whose current arrangement was a personal pension plan, rather than an occupational pension scheme. However, the principles and guidance set out by the Ombudsman are clearly of general application, and trustees or managers of occupational schemes will equally need to take note of his comments.
Key points in the Ombudsman’s decisions
In all three cases, the member had approached the administrator of their current arrangement to request a transfer to a new scheme, which purported to be an occupational pension scheme. Upon the administrators’ refusal to process the transfer request, the members lodged complaints with the Ombudsman.
In the first two cases, the Ombudsman dismissed the complaints on the grounds that the member had no statutory CETV right, since the receiving arrangement did not meet the legal requirements for an occupational pension scheme. Because of their overly-wide eligibility criteria, neither arrangement could be viewed as providing benefits to people with service in “employments of a description” (as required by the Pension Schemes Act 1993).
In all three cases, it was also held that there was no CETV right because the payment would not have been used by the receiving scheme to provide “transfer credits”, which are defined as rights allowed to “an earner”. The members did not meet the requirement to be “an earner” since they had received no earnings in any employment of a description to which the scheme related.
The third complaint was partially upheld, since although the member had no statutory CETV right, the administrator had a separate discretion under the scheme rules to pay a transfer value, which it had not considered exercising. The Ombudsman directed that the administrator should now consider whether to exercise that discretion.
Finally, in the first two cases, the Ombudsman also considered that the payment would have been an unauthorised payment, though for different reasons in each case.
In one case, the fact that significant charges (fees of 15%, plus an introducer charge and a separate charge of £1,000) would have been taken from the payment on receipt by the new administrator was held to be sufficient to render the payment unauthorised, since it would mean that not all of the transfer payment would have been used for the purposes of a registered pension scheme or to represent rights under such a scheme.
In the other case, the membership criteria were so badly drawn that the complainant could not legally have become a member. Because of this, the transfer payment could not have been used to provide rights for her under the scheme’s rules (and so would have been unauthorised).
Wider implications of the Ombudsman’s decisions
The Ombudsman took the opportunity to make a number of comments in relation to pensions liberation and the way that cases of suspected pensions liberation should be handled.
The administrators in each case were criticised for making a decision not to pay a transfer without properly considering whether the member had a statutory CETV right. The Ombudsman carefully reviewed the deeds and rules of the receiving schemes in order to assess whether each one qualified as an occupational pension scheme, and it was made clear that the administrators of the transferring arrangement would be expected to undertake a similarly detailed review.
More generally, the Ombudsman made it clear that the onus is on the administrators of the transferring arrangement to satisfy themselves as to whether there was a CETV right and whether the transfer would be an authorised payment. There is no obligation on the member to prove these facts.
Should the administrators of the transferring arrangement conclude that there is no CETV right, or that the transfer would be an unauthorised payment, that conclusion must be justified to the member. The Ombudsman acknowledged administrators’ concerns that giving further details to justify conclusions may be unattractive, because doing so could assist those behind pensions liberation fraud to evolve better arrangements for the future. However, it is clear that at least some kind of explanation to the member is expected, despite such concerns.
In February 2013, the Pensions Regulator published “Pension liberation fraud: an action pack for pension professionals”, which set out a number of checklists for administrators to follow if liberation fraud was suspected, including follow-up questions to be raised with the member or receiving scheme. The Ombudsman made it clear in all three decisions that the transferring scheme administrators would be expected to follow this guidance in detail.
One administrator in particular was criticised for its “defeatist” decision not to use the questions provided by the Regulator as it believed that it would be a “waste of time” to ask the follow-up questions. In the administrator’s view (from previous experience), new scheme providers often supply generic answers which may not be entirely true but which cannot be verified. The Ombudsman’s counter-argument was that asking the questions offered at least a slim chance that the member may think better of their initial request to transfer, or at least seek further advice from other entities such as The Pensions Advisory Service.
The Ombudsman has made it clear that administrators must not make assumptions when considering transfer requests for pensions liberation purposes. Each individual case must be considered carefully before a final decision is made. Once that decision has been made, justification of any refusal to transfer must be provided to the member with as much detail as possible (being mindful of the risk of assisting liberation fraudsters).
The Ombudsman has also stated clearly that the onus is not on the member to establish the validity of the transfer request. Although understandable, given the complex and detailed legal analysis which must be gone through to determine the status of the receiving arrangement, this nevertheless removes what has previously been a useful tactic for transferring scheme administrators who wish to frustrate pension liberation scams. Further, we anticipate that administrators will be frustrated by the onus being put on them to establish the precise status of the receiving scheme and the member’s transfer rights. However, the clear need to obtain and analyse the scheme’s deed and rules and other evidence regarding employment status does at least enable the transferring scheme legitimately to delay the transfer process whilst their concerns are investigated.
These decisions are all ones relating to a purported exercise of the statutory right to take a cash equivalent transfer, and all essentially turn on the statutory restrictions and definitions involved in the CETV regime. It is worth noting that if scheme rules provide members with an absolute right to transfer out even where there is no CETV right, the transferring scheme administrators may well have more limited scope to rely on these kinds of technical arguments to prevent a transfer. And if the rules (as is common) contain a discretion to permit a transfer where no statutory right applies, it will be important to ensure that the discretion is duly considered.
Finally, taking a step back, and looking ahead to the new pension flexibilities which will become available from 6 April, there is increasing evidence that the pensions liberation fraudsters are now turning their attention to members aged 55 or over, and are looking to get their victims to take their benefits as 100% cash (with potentially detrimental tax consequences for the member), seduced by the lure of attractive investment returns in “too-good-to-be-true” deals. This new route avoids completely the need to satisfy the statutory CETV requirements, and as such circumvents any protection which arises from these determinations. Schemes which are looking to update their rules to reflect the new flexibilities may want to consider retaining some control over access to the new options, so that they do not become too easy a way for the scammers to defraud members.