This briefing explores the issues raised in three recent Pensions Ombudsman (PO) cases surrounding the duties of employers, trustees and administrators to members of pension schemes.
In Ramsey, the Deputy Pensions Ombudsman (DPO) rejected the member’s complaint that the employer, trustee and administrator failed to inform him of an increase in personal tax liability arising from a change in the annual allowance and Mr Ramsey’s decision on how to take his pension benefits.
In Dawson, the PO rejected the member’s complaint that he should have been reminded that he had not drawn down his maximum permitted annual income.
In Gregory, the PO upheld the member’s complaint in relation to a transfer request from a defined contribution (DC) plan to a group personal pension (GPP). The PO held that the relevant scheme information was insufficiently detailed.
Ramsey (PO-3290 – August 2014)
The DPO received a complaint from Mr Ramsey against the trustee, the employer and the administrator of a defined benefits (DB) scheme. He complained that all three parties failed to advise him that by taking benefits under the scheme after a certain date he would exceed his annual allowance thereby incurring the annual allowance tax charge.
The annual allowance is the maximum level of pension contribution which can be made in a tax year without attracting tax liability. The annual allowance was reduced from £255,000 to £50,000 on 6 April 2011, as part of the coalition Government’s measures to curtail the availability of pensions tax relief. Exceeding the annual allowance attracts an annual allowance charge of 55 per cent.
In 1998 the company that employed Mr Ramsey was sold and the scheme closed to future accrual. Mr Ramsey became a member of the company’s new DC scheme and was also was given an option to transfer his benefits in this scheme to another DB arrangement. He exercised this option in May 2011 shortly after the annual allowance was reduced. The transfer triggered an annual allowance charge of £7,553.43.
Mr Ramsey argued that if he had known of these potential tax consequences he would have transferred his benefits earlier (before the annual allowance was reduced with effect from 6 April 2011) and avoided the liability. He therefore claimed that the trustee, the employer and the administrator were under a duty to warn him of the tax consequences of his decision.
The DPO rejected Mr Ramsey’s complaint on four grounds:
- there was no such legal obligation on the respondent parties. When Mr Ramsey decided to exercise his option he was not yet a scheme member and the Cowan v Scargill duty on the trustees to act in his best interests did not apply. Neither was there a common law duty on the employer to inform Mr Ramsey of the financial benefits of exercising his option before a change in tax law. The administrator’s only duty was to provide an annual pensions savings statement;
- the written pension estimate did not constitute advice. It stated that if Mr Ramsey required financial advice he should contact a financial adviser;
- the respondents were unsure of the tax implications of the option. As the correct position was only confirmed by HMRC in late 2012, they could not have reasonably been expected to inform Mr Ramsey that he would incur a charge; and
- the DPO found that on balance, if Mr Ramsey had been informed of the potential liability, he would still have exercised the option given the “very considerable” disparity in benefits.
In reaching this decision, the DPO relied on both the disclaimer in the letter from the administrator to Mr Ramsey, and the recommendation to seek financial advice. This highlights the importance of disclaimers where members are required to make decisions on the basis of information supplied.
Dawson (PO-596 - July 2014)
The PO received a complaint from Mr Dawson against his Self-Invested Personal Pension (SIPP) administrator and trustee that they had failed to inform him the level of further income he could take under his drawdown arrangement during the 2007/8 pension year.
Between 6 April 2006 and 5 April 2011, a member of a DC scheme had a choice between drawing his benefits as a scheme pension, taking a lifetime annuity or (provided he was under age 75) using a form of drawdown known as an unsecured pension.
If he chose an unsecured pension, he was entitled to make income withdrawals up to an annual limit determined in accordance with Government guidelines. Unsecured pensions were subsequently replaced by the drawdown rules under the Finance Act 2004.
In 2007, Mr Dawson began drawing his scheme benefits. He received a letter from the trustee and administrator setting out the value of his fund, the maximum permitted annual income drawdown for that year and the terms of his drawdown arrangement.
He drew down part of the maximum annual drawdown and the pension year ended before he had taken the balance. He then inadvertently took the balance in the following pension year, and was informed of his remaining available drawdown for the second year. At this point he realised he had not taken his full allowance in the first pension year, and could not backdate payments.
Mr Dawson complained that the administrator and trustee should have reminded him before the end of the pension year that he had not taken the maximum annual income. He submitted that the alleged failures had cost him £43,790 in lost income for the relevant pension year. Neither he nor his financial adviser had known about the “pension year” and instead had based his affairs on the fiscal year.
The PO held that Mr Dawson had received letters from the administrator and trustee and therefore knew, or ought to have known, that the amount of yearly income withdrawal could be varied up to the stated maximum as well as the meaning of the term “pension year”. He ought also to have known how much he had drawn down at any given time.
Was there an obligation to inform the member?
The PO held that the administrator and trustee of a SIPP had no general obligation under trust law, contract or statute to remind a member who was making income withdrawals under an unsecured pension option that he could draw down further income during a given pension year. Further, the PO held, if he had succeeded, Mr Dawson's loss “would be nothing like the total sum” claimed. The £43,790 of “lost” drawdown income remained as capital in Mr Dawson's scheme fund.
Gregory (PO-623 - April 2014)
The PO upheld a complaint by a member who transferred his accumulated fund from an occupational DC scheme to a GPP. The PO held that a pension provider could not rely on statements contained in the FAQs section of a transfer information pack, which the complainant had not read.
Mr Gregory was a member of a DC plan. His contributions were invested 80 per cent in equities and 20 per cent in cash. In late 2011 he asked for future contributions to be invested 100 per cent in cash. Around this time, Mr Gregory's employer closed the DC plan and moved him to a new plan, a GPP.
Before contributions to the GPP began, the provider informed Mr Gregory that his default fund was “cash”, later submitting that this simply duplicated his standing instructions for the DC plan. Mr Gregory also received an information pack about transferring his pension and a transfer form which both suggested that his investment proportions would remain the same as they had historically been in the GPP. However, the frequently asked questions (FAQs) stated that his “transfer payment will be invested in the same funds as your regular GPP contribution”. The transfer took place with 100 per cent of the transfer value invested in a GPP cash fund.
Mr Gregory complained to that the provider failed to explain that his transfer value would be invested in the same way as his ongoing monthly GPP contributions and would not mirror his existing DC plan investments. As soon as he realised the true position, he argued, he sought to replicate his DC plan investment structure in the GPP. The provider acknowledged that if this had happened from the transfer date, Mr Gregory's GPP fund would have been £15,786.44 greater by the date he chose to alter the underlying investment structure to 50 per cent equities and 50 per cent cash.
The PO upheld the complaint and found the provider guilty of maladministration. This decision was reached on the basis that the clearest explanation provided to Mr Gregory that the transfer value would be invested in the same proportions as his monthly contributions was to be found in the FAQs. Though the FAQs stated the position accurately, the PO said the FAQs may not necessarily be read by members. They were provided in case of questions that the reader might have and were not intended to be read in detail as a way of finding information for the first time. Mr Gregory had not read the FAQs and it was held that the provider could not rely on them.
The PO found that the information in the main body of the pack could be misleading to a lay person as references to “existing policy” and “existing contributions” could also have been interpreted as referring to the transferring DC plan. The PO directed the provider to recalculate Mr Gregory's fund value as if the transfer value had been invested with the 80/20 split from the transfer date.
What do these cases tell us about trustees’ and employers’ duties towards members?
In isolation the Gregory decision demonstrates that key information should be set out in the main body of a communication, not the FAQs. This is an important lesson for administrators, trustees and employers, and a consequence is that the process of determining what information is key, and what information is not, becomes critical. The Gregory decision also implies that pensions providers must take general care to guide members through the complex landscape of the impending Budget flexibility changes.
There have been few Ombudsman complaints concerning the unsecured pension regime or drawdown pensions in general. The decision in Dawson will be welcomed by providers. Though determinations of the PO and DPO are binding only on the parties involved and do not provide precedent for future cases, they provide nonetheless valuable directions. A balance must be struck between providing an adequate level of detail in member communications without giving actual financial advice. Where any financial advice is given, care must be taken to ensure it is generic advice only. These cases are a reminder of the importance of disclaimers and recommendations to seek independent financial advice.
The trustee, employer and administrators in Ramsey may feel fortunate not to be considered responsible for failing to warn the member of the changing tax rules, especially given the scale of the reduction in the annual allowance. Though the Ramsey and Dawson decisions will be welcomed by trustees and administrators, they should give rise to extra care being taken when informing members of their options in the future.