Over recent weeks we have seen an increasing number of queries from trustees and administrators who have received transfer requests from members where pensions liberation may be the ultimate goal. Here, we consider trustees' duties when they receive a transfer request and the routes open to trustees who may be concerned.
What is pensions liberation?
Pensions liberation can come in two different guises:
- where a member transfers their pension savings to another arrangement so that they can access their lump sum before age 55; and
- where, although aged over 55, the member transfers their pension savings to another arrangement so that they can access more than 25% of their pension as a lump sum.
While accessing a lump sum early or seeking to take more than 25% of pension savings as a lump sum is not illegal, it does have severe tax consequences (the whole of any lump sum taken before age 55 and any amount taken after age 55 that exceeds the permitted 25% of pension savings would be taxed at 55%).
When does pensions liberation become fraud?
Often, the people being targeted are not told of the hefty tax penalties or how the remainder of their pension will be invested, nor of the charges that the new provider will impose. Commissions or arrangement fees are typically between 10% and 30% of the amount transferred. There have been cases of members not receiving the lump sum they originally wanted to access.
What are the warning signs?
The warning signs trustees and administrators should look out for include:
- the receiving scheme is not registered or is only newly registered with HMRC;
- the principal employer of the receiving scheme is a recently registered company;
- the member does not work for the principal employer of the receiving scheme;
- the member had indicated that they want to take advantage of a legal loophole;
- the member is aged less than 55 and has indicated that they wish to access their pension early;
- the receiving scheme was previously unknown but is now involved in more than one transfer request;
- the member is pressurising the trustees or administrators to carry out the transfer quickly (the member's advisers or 'introducer' may be putting pressure on the member to complete the transfer quickly and may offer a cash incentive for doing so);
- the scheme name is similar to a legitimate scheme name but is spelt slightly differently.
What are the trustees' legal duties when they receive a transfer request?
The Pension Schemes Act 1993 provides that a member has a right to request a transfer of his pension benefits to an "occupational pension scheme" or to a "personal pension scheme" provided that he is more than 12 months from his normal pension age and has made a formal request within the time limit set out in the Act. If the statutory requirements have been complied with and the trustees make the transfer payment, they receive a statutory discharge against any further liability or obligation to provide those benefits.
The difficulty faced by trustees is that the transfer requests often appear legitimate and fall within the statutory requirements, leaving trustees with little option on the face of it but to accede to the request. Where pensions liberation is suspected, therefore, there may be a mismatch between the trustees wanting to do the "right" thing by a member (by preventing the member from falling victim to a potential fraud) and how far they are actually permitted to go under the strict letter of the law.
What are the options for trustees then?
A number of people within the pensions industry have started to suggest that a transfer request should not be implemented where there are concerns about pension liberation. Considering whether to adopt such a stance would require very careful thought and legal advice beforehand.
The Pensions Regulator has issued a statement indicating that where trustees have reason to believe that member funds may be liberated and can evidence their concerns, it will take this into account when considering whether it should take any action in respect of non-payment of a transfer. The Regulator does, however, expect trustees to be able to demonstrate that they have taken steps to establish the legitimacy of an arrangement where they have delayed making a transfer for that reason.
This is not altogether helpful for trustees who need to make a decision on how far they should go and how much evidence they need in order to refuse a request.
From a practical point of view, the trustees should consider:
- obtaining a copy of the Trust Deed and Rules of the receiving scheme;
- asking for and checking the Pensions Regulator and HMRC registration details;
- asking the member for details of their link with an employer participating in the receiving scheme (can they prove that they are an employee or former employee?);
- asking the member how they became aware of the receiving scheme;
- asking the member for copies of promotional materials, emails or letters about the receiving scheme;
- asking the member if they are hoping to unlock a lump sum before age 55.
Ultimately, each case should be judged on its own facts. Trustees need to weigh up the potential cost consequences that the situation in question could generate. If a member brings a claim because the transfer has been delayed or not implemented at all, how would that compare with a challenge brought because the member has lost a significant proportion of their pension because the transfer went ahead?
We are aware of a number of trustees who, given their concerns about the transfer and evidence that all may not be as it seems, have delayed making the transfer on grounds that the receiving scheme is not obviously an occupational pension scheme (for example, because the principal employer and the member do not, and have never had, any employment relationship). As a result, the trustees are not certain of obtaining their statutory discharge.
Sometimes it may be necessary for the trustees to observe the reaction to such a refusal - the option is always open to them to make the transfer if the member is able to provide additional evidence that gives the trustees the comfort they need. Where that happens, we would recommend obtaining a non-statutory discharge from the member.
We also recommend that where trustees receive transfer quotation requests in the future, they should send copies of the Regulator's fraud awareness leaflet with the quotation as a matter of course. More generally, it is important to remain vigilant whenever transfer requests are received..