The much-awaited first determinations of the Pensions Ombudsman in the "pension liberation transfer cases" have started to emerge.

To date, four determinations have been published, three of which concern blocked transfers from ordinary pension schemes to suspected "pension liberation schemes" and the other, a blocked transfer from a suspected pension liberation scheme to another pension scheme.  This article concentrates on the first three determinations mentioned, as they will be of wider interest. They concern the complaints brought by Mrs Diane Kenyon against Zurich Assurance Ltd (PO-1837), Mrs Sharon Jerrard against Aviva plc and relevant subsidiaries (PO-3809) and Mr Gregory Stobie against Standard Life Assurance Limited (PO-3105).   

The Ombudsman determined that the members did not have a statutory right to transfer, although under the rules of the Standard Life scheme of which Mr Stobie was a member, the scheme administrator had a discretion as to whether to allow a transfer, which had not been properly considered, so the scheme administrator was directed to do so now. 

The determinations all involved transfer requests from personal pension schemes. Nevertheless, the key parts of the Ombudsman's analysis would apply equally to any transfer requested from an occupational pension scheme. Therefore, trustees do need to take note and I explain below some of the steps that they might wish to take, when faced with a request from a member to transfer to a suspected pension liberation scheme.

The approach of the Ombudsman

In his determinations, the Ombudsman recognised the importance to the pensions industry of his rulings.  Also, he acknowledged that, as these cases involved a determination of legal rights, he was obliged to reach his determination "in accordance with legal principles – in substance reaching a decision equivalent to the decision that a court could have reached, and… must provide the same legal remedy as a court would in the same circumstances".

The focus of the Ombudsman was the provisions of the Pension Schemes Act 1993 ("the 1993 Act") that, where the applicable requirements are satisfied, give members a "statutory right" to transfer.  He also considered relevant provisions of the Finance Act 2004 ("the 2004 Act") and the rules of each scheme at issue.

The Ombudsman's analysis

The key requirements of the 1993 Act identified by the Ombudsman were that:

  • the intended receiving scheme must be an occupational pension scheme (of course it is possible to transfer to a personal pension scheme, but in practice that is not how pension liberation schemes are usually set up – assuming they are properly established at all); and  
  • the transfer value payment will be used by the receiving scheme to provide the member with "transfer credits" under it.

In two of the cases (Kenyon and Jerrard), the Ombudsman determined that the intended receiving schemes were not occupational pension schemes.  In the other (Stobie), the Ombudsman determined that the intended receiving scheme was an occupational pension scheme, but that the transfer payment could not, on the facts, be used to acquire transfer credits under it.

Occupational pension scheme

In considering whether the intended receiving schemes are occupational pension schemes, the Ombudsman relied heavily on a 2013 case that I was involved with (Pi Consulting (Trustee Services) Limited v The Pensions Regulator).  In that case, the High Court identified two tests that, in most cases, will be key to determining whether a scheme is an occupational pension scheme: the "purpose test" and the "founder test".

In summary:

  • to satisfy the purpose test, a scheme must be established for the purpose of "providing benefits to, or in respect of, people with service in employment of a description" and, if desired, to others. This is to be judged by reference to the provisions of the relevant scheme's governing documents, rather than the intentions of those who established the scheme or how the scheme is being administered in practice; and  
  • the usual way to satisfy the founder test is for a scheme to be established by, or by persons who include, an employer of those persons who are in the description of employment to which the scheme relates. 

The governing provisions of the two schemes that were determined not to be occupational pension schemes were not clear as to the description of employments to which they related, hence they failed the purpose test. 

In short, the Ombudsman determined that the schemes appeared to be open to anyone.  Whilst, in principle, that does not bar a scheme from being an occupational pension scheme, it works only if there is at least one specifically described employment – for example, employees of XYZ Limited – who are eligible for membership and then a provision allowing anyone else to join.  This may seem a technicality, but the Ombudsman is approaching matters no differently than Morgan J did in the Pi case in strictly applying the relevant requirements. 

It is worth pausing to note that the governing provisions of one of the intended schemes were so poor that the Ombudsman considered whether, in fact, the trusts of that scheme were void for uncertainty – as was held to be the case by the High Court in the scheme at issue in The Pension Regulator v A Admin Limited. The Ombudsman concluded that they were not.  Further, like Morgan J in Pi, the Ombudsman proceeded on the assumption that the schemes at issue were not shams, without ruling either way on the point.   

In the third case, the intended receiving scheme satisfied both the purpose and the founder tests, but the issue was with the rights that would be granted to Mr Stobie, in return for any transfer payment received. 

Transfer credits

Transfer credits are rights allowed to an "earner" (a person with remuneration or profit from an employment) under the rules of the scheme. 

In Mr Stobie's case, the receiving scheme employer was not yet trading, so Mr Stobie had not received any remuneration from that employer.  As Mr Stobie had no earnings from that employer, the Ombudsman determined that he was not an "earner" and so he would not be granted "transfer credits" in the intended receiving scheme, if a transfer value were paid into it from his current scheme. To be clear, he would have been granted rights under the receiving scheme, but the fact that those rights would not qualify as transfer credits meant that he could not insist on the transfer value being paid.  

Again, this is another incredibly fine distinction. Moreover, it is one that Mr Stobie can easily put right, as he controls the employer of the receiving scheme and can arrange for it to pay him some remuneration. 

The 2004 Act

The matters described above were sufficient for the Ombudsman to dispose of each complaint, but he went on to consider the positon under applicable tax legislation anyway.

In order for proposed transfer payments to intended receiving schemes to qualify as "recognised transfers" under section 169 of the 2004 Act, and so be "authorised payments" for tax purposes, the transfer values would have:

  • to be held for the purposes of another registered pension scheme or a "QROPS", or to represent rights under any such scheme;  
  • in connection with the relevant person's membership of that scheme.  

In Stobie, the Ombudsman determined that the requirements would be satisfied. 

In Kenyon and Jerrard, the Ombudsman determined that these requirements would not be satisfied: in Jerrard the Ombudsman determined that Mrs Jerrard would not actually qualify as a member under the governing provisions of the scheme at issue, so any transfer value to it in respect of her could not be held in connection with her membership of that scheme; in Kenyon, the Ombudsman was concerned on the evidence available about the purpose for which monies transferred into the scheme would be held.   

More to come

What we don’t have yet is a determination in any case where trustees allowed a transfer payment to be made to a suspected pension liberation scheme and the member concerned is now regretting that and complaining that the trustees of his or her former scheme should not have done so.  However, the Ombudsman has announced that he is currently considering one such complaint and expects to publish his determination in it, in the first half of this year. 

Practical points for trustees

Whilst the Ombudsman did not find against any of the scheme administrators and acknowledged the difficulties that they faced, he was critical of the approach that they took in declining to pay transfer values to the schemes concerned.  In each case, the scheme administrators failed to undertake sufficient due diligence on the receiving arrangements to ascertain whether or not they were, in fact, occupational pension schemes and if so, whether the members would receive transfer credits under them.

Therefore, if trustees are concerned about a scheme to which any of their members is seeking to transfer – and trustees should of course continue to take all of the steps that they will have been taking to date, to be alive to suspected pension liberation schemes – the right approach is to conduct appropriate due diligence in relation to the intended receiving arrangement.

Appropriate due diligence includes asking for copies of: the scheme's governing documents; evidence of the employment relationship that the member has or will have with any employer in respect of that scheme, and the remuneration that is being, or will be, received from that employment; and confirmation of the purpose for which the transfer payment will be held or the rights that will be granted under the receiving scheme. 

It is this information and documentation that, in relation to a purported occupational pension scheme, will enable trustees to determine whether or not a receiving arrangement meets the purpose and founder tests; and if so, whether the member will be receiving transfer credits in return for any transfer payment made to that scheme; and whether making the transfer payment will constitute an authorised payment for tax purposes. 

It should also be noted that the governing documents for some receiving schemes are so bad that they do not constitute a valid trust at all, in which case there will usually be no scheme to transfer to. 

Also, some intended receiving schemes may be shams as a matter of law, but that is not something that trustees will usually be able to conclude for themselves and will normally require a lengthy Court hearing to determine.  In Pi and in these recent Pensions Ombudsman determinations, the judge and the Ombudsman (respectively) proceeded on the basis that the schemes at issue were not shams, rather than investigating and determining the point. It is difficult to see that trustees can do anything other than follow suit.

If the member is unable to provide, or procure from the proposed receiving scheme, information and documentation sufficient to evidence that he has a statutory right to transfer, then in principle trustees can refuse to pay a transfer value - subject to any obligation or discretion under their scheme's rules. 

If trustees have made all reasonable enquires to no avail and a member were to complain to the Ombudsman or the Court, he would have to show that he had such a right, which he could not do without evidence.  Indeed, as the Ombudsman observed in the last paragraph of his determinations in each of Jerrard, Kenyon and Stobie, if trustees have asked appropriate questions, pursued answers and yet do not receive any – or at least, not any sufficient answers – from the member or his intended receiving scheme, it seems reasonable for trustees to draw appropriate inferences from that.

If the member were at any time able to produce sufficient evidence, the trustees would then need to pay the transfer value, whether or not they "approve" of the member's choice of receiving arrangement.

As has been made clear by the recent Merchant Navy case, there is no free-standing duty on trustees to act in members' best interests, rather their duty is to administer the pension scheme consistently with the purpose for which it was established, and to use each power under it consistently with the purpose for which it was conferred. Or, as the Pensions Ombudsman put it in Jerrard, "in the end, though, once Aviva had followed all the relevant steps, the individual's right to make what might be a life-changing mistake must take supremacy over Aviva's obligation to help them not to".   

Unfortunately, none of this is straightforward for trustees and administrators, but that is not the Ombudsman's fault. Of course, where trustees are unsure of the position, they should take legal advice.