On 19 February 2016 a High Court judgment was issued in relation to an appeal from a Pensions Ombudsman (PO) determination. This case is relevant to the issue of pension liberation and how trustees should deal with members' transfer requests, and is significant because the court disagreed with the approach taken by the PO to a particular aspect of analysing whether a member has a statutory right to transfer. In this Pensions Alert we provide an overview of the judgment and consider its implications for trustees and their approach to transfer requests.
For some time now, a tricky issue for trustees of occupational pension schemes (and providers of personal pension schemes) has been what approach to take when a member requests a transfer out but they suspect that the receiving scheme may be connected to pension liberation.
In 2015 a number of determinations were issued by the (previous and current) PO in relation to such cases. These determinations were useful in demonstrating the PO's approach to assessing whether a statutory right to transfer exists, although they made it clear that where a member does have such a right, the transfer cannot be blocked simply because there are warning signs that the receiving scheme may be connected to pension liberation.
The PO's determination in this case
In the determination in question, the member requested a transfer from a personal pension scheme to a small self-administered scheme. The PO was satisfied that the proposed receiving scheme met the criteria to be an occupational pension scheme and that there was no reason to object to the transfer as being an unauthorised payment.
However, he did not think that the member had a statutory right to transfer because the legislative requirement that the transfer must be for the purposes of acquiring "transfer credits" was not met. Transfer credits are defined as "rights allowed to an earner". The PO took the view that whilst there is nothing in the legislation which expressly states that the person's status as an earner has to be in relation to a scheme employer, it does have to be because there would be "arbitrary consequences" if earner just means a person with any earnings from any source. Whilst the member had an employment agreement with the Principal Employer of the proposed receiving scheme which stated that she would receive such remuneration as is agreed, the company was not trading and the member was not receiving a salary from it. The PO concluded that the member was not therefore an earner in relation to a scheme employer.
The member appealed to the High Court, submitting that the definition of "earner" should not be construed in such a restrictive way. She argued that there was no requirement in the legislation for her to be an earner in relation to a scheme employer of the receiving scheme.
The Court's conclusions
The judge stated that the PO's interpretation involves reading words into the definition of transfer credits and noted that the courts exercise considerable caution before interpreting a statute by adding, omitting or substituting words. In this case, he was not satisfied that he could read words into the definition of "transfer credits". The judge therefore concluded that he could not accept the PO's interpretation and instead the word "earner" should be given its general meaning in accordance with certain provisions of the legislation which set out the meaning of "earnings" and state that "earner" shall be construed accordingly.
Given that it was agreed that the member was an earner by reason of her earnings from another source or sources (although these sources are not named in the judgment), the judge concluded that it follows that she was entitled to transfer her rights out to the occupational pension scheme.
As the appeal succeeded on this ground, the court did not consider the second ground of appeal concerning the provider's refusal to make the transfer pursuant to a discretion under the scheme rules.
Statement from the PO
On 22 February the PO issued a statement welcoming the clarity that the judgment brings, and stating that it provides instruction to trustees that, assuming the other requirements for a statutory transfer are met, members do not need to be in receipt of earnings from a sponsoring employer of the receiving scheme, but rather, earnings from another source are sufficient.
The PO went on to state that it "seems likely that most transferring members will meet this requirement so, beyond verification of earnings and the provision of risk warnings, trustees and administrators will be conscious that under current legislation they cannot refuse such a transfer - even if they have significant concerns that it may be for the purposes of pension liberation".
Implications for trustees
Trustees will need to update the checks that they complete when assessing whether there is a statutory right to transfer to reflect the court's decision as to when a member is an "earner". As transferring members may be able to demonstrate that they are in receipt of earnings from some source, even if not from a scheme employer of the proposed receiving scheme, this judgment is likely to widen the number of cases where it is concluded that a statutory right to transfer exists.
As to the question of what constitutes "earnings", the legislation referred to in the judgment states that earnings include "any remuneration or profit derived from an employment", but it also provides further information about what this includes. We would therefore suggest that trustees seek legal advice when updating their transfer processes and where transfer requests are received and it is not clear whether the member has a statutory right to transfer or there are warning signs that the receiving scheme may be involved with pension liberation.
As well as updating their checks for future transfer requests and those that are currently in progress, trustees should be aware that members whose requests have previously been refused on the basis that the transfer was not for the purpose of acquiring transfer credits may ask for their requests to be re-considered. It is also worth bearing in mind that where a transfer relates to defined benefits, the statutory requirement to check that the member has taken independent advice before making the transfer may now apply. Trustees who have previously refused transfer requests on the basis that the member was not an "earner" should also consider seeking legal advice on whether those cases need to be pro-actively re-considered.
When updating transfer processes or re-considering applications, trustees should also remember that it remains good practice for them to follow the industry code of practice on combating pension scams.