The Pensions Ombudsman has finally published the first three in a series of determinations dealing with complaints relating to pensions liberation.  Eagerly awaited by the pensions industry, these determinations contain useful guidance for trustees  on how to deal with transfer requests where they suspect a pensions liberation purpose.

Comment

The Ombudsman upheld the providers’ decisions to refuse the transfer requests on the grounds that  the members had no legal transfer entitlement. His careful analysis of the tests for whether a  scheme is an occupational pension scheme, and whether transfer credits will be provided, will be  welcomed by the pensions industry and in particular by trustees considering transfer requests that  raise pensions liberation concerns.

However, there is a note of caution to be observed in the determinations. In all three cases,  although the Ombudsman rejected (or, in the third case, partially rejected) the members’  complaints, he commented that the providers had failed to reach their decisions to refuse the  transfer requests on the correct grounds. The providers had not considered whether the members had  a transfer right and instead focussed on the suspicion that the receiving schemes were liberation  vehicles.

While the Ombudsman acknowledges that suspicions as to the purpose of the transfer may justify  schemes in “delaying the transfer and asking relevant questions during the statutory period allowed  for the transfer ... there is no direct link between a transfer being for pensions liberation  purposes and ... there being no statutory right to the transfer”. He states clearly in all three  determinations that it was for the providers to satisfy themselves that the members did not have a  transfer right, rather than for the members to satisfy the providers that they did have a transfer  right. Trustees will therefore need to be careful to ensure that, should they decide to reject a transfer request, they are doing so because they have analysed  whether the member has a transfer right and have decided that he or she does not. They should also  make it clear when communicating the refusal to the member that this is why the request has been  rejected. Trustees of schemes who have discretion to make a non-statutory transfer should ensure  that – as with any discretion – they at least consider whether to exercise this discretion and that  they communicate their decision to the member.

Where a member has a transfer right, it seems that trustees who refuse to make the transfer because  they suspect (or even know) that the member is engaged in pensions liberation will receive no  support from the Ombudsman.

Background

Industry interest in the problem of pensions liberation has soared over the last couple of years as  liberation schemes have become more widespread and more sophisticated.  Industry regulators have  also taken an increased interest in the issue, with the Pensions Regulator, the FCA and HMRC (among  others) working together to produce guidance and an action pack for schemes and advisers to combat  the problem. The Regulator has also taken action against suspected liberation vehicles, appointing  independent trustees to a number of schemes, and recently announcing that it has shut down five  connected liberation schemes.

The increased number of transfer requests to possible liberation vehicles has led many schemes to  delay making transfer payments and, in some cases, to refuse transfer requests. As of late October  2014, the Ombudsman had received over 140 complaints relating to pensions liberation. Almost 90% of  those complaints were from members whose scheme had refused a transfer request because the scheme  believed that its purpose was pension liberation (known as “blocked transfers”).

TRANSFER  RIGHTS Under legislation, a deferred member of an occupational or personal pension scheme has a right to  transfer the cash equivalent of his or her pension benefits to another occupational or personal  pension scheme. This right generally lapses once the member is less than 12 months from normal  pension age1. Legislation sets out how the cash equivalent of the member’s benefits is to be  calculated. Schemes have six months following receipt of a statutory transfer request to make the  transfer payment. Failure to comply with a statutory transfer request or delaying the making of a  statutory transfer payment beyond the six month deadline without reasonable excuse can result in  civil penalties for the scheme trustees/provider.

Some schemes will also have a rule giving deferred members a non-statutory right to transfer their  benefits. The extent of this right will depend on the wording of the rule.

The Ombudsman’s determinations in detail

All three complaints related to blocked transfers from personal pension schemes. All three  receiving schemes were registered pension schemes and, in their governing documentation, purported  to be occupational pension schemes2.

In two of the three cases, the Ombudsman decided that the members did not have a statutory transfer  right as the receiving schemes were not occupational pension schemes. In order for a scheme to be  an occupational pension scheme, it must be established “for the purpose of providing benefits to,  or in respect of, people with service in employments of a description”. The Ombudsman considered  that this provision meant that it must be possible to identify “a closed list of classes of  employment to which the scheme relates”. He decided that, in these two cases, the provisions  governing membership of the scheme were either so wide or so unclear that it was impossible to identify the necessary classes of employment.

In the third case, it was possible to identify a closed list of classes of employment and the Ombudsman therefore decided that the receiving scheme was an  occupational pension scheme. However, he went on to decide that, nonetheless, the member did not  have a statutory transfer right as the transfer payment would not be used to secure “transfer  credits” in the receiving scheme. This was because transfer credits are rights allowed to an  “earner” under the receiving scheme. The Ombudsman decided that, although the legislation does not  expressly say so, the member’s status as an earner must be in relation to an employer in the  receiving scheme. The member in the third case was not employed by one of the receiving scheme’s  employers and therefore was not an earner for the purposes of acquiring transfer credits.

However, in the third case, the scheme had discretion to make a non-statutory transfer and the  Ombudsman decided that the scheme provider had failed to consider whether it should exercise this  discretion. The Ombudsman therefore directed the provider to reconsider the member’s transfer request on these grounds.