A recent determination by the Pensions Ombudsman (the case of 'Mrs H, PO-21489) serves as a reminder of the level of due diligence required of pension plan trustees, managers and administrators when considering transfer out requests in order to protect members against pension liberation fraud.
In the case, the Ombudsman directed Hampshire County Council to reinstate Mrs H's benefits in the Local Government Pension Scheme – Hampshire Pension Fund after finding that the Council had failed to carry out adequate due diligence checks before making a transfer in 2013 to a pension liberation vehicle (the Receiving Plan). The Ombudsman commented that "it seems highly likely that she has lost all or most of her pension benefits as a consequence."
The Council's position was that it had undertaken appropriate due diligence when considering the transfer request as:
- it had sent Mrs H a copy of the Pensions Regulator's action pack (dated February 2013), Pensions liberation fraud – The predators stalking pension transfers (the Scorpion Warning), before her transfer notifying her of the risk of scams, and
- Mrs H had signed a discharge form implying that she had read the Scorpion Warning.
The Council also held the view that it could not refuse to process the transfer as it believed it was a statutory transfer request.
The Ombudsman ruled that the Council could in fact have refused to implement the transfer as Mrs H did not actually have such a right at the relevant time. Under the legislation dealing with transfers, Mrs H was only entitled to a statutory cash equivalent transfer value from an occupational pension scheme where she would receive "transfer credits" in the new arrangement.
As transfer credits are defined as rights allowed to an "earner" and, when the transfer was made, Mrs H was living on state benefits and had no employment earnings, the Ombudsman ruled that Mrs H was not an "earner" and could not be entitled to transfer credits in the Receiving Plan.
The Ombudsman also held that if the Council had realised that it did have discretion whether to make the transfer, it seems likely that, based on the Scorpion Warning, it would have noticed several "red flags" including that:
- Mrs H was approaching her normal retirement age and was living on the South coast but the employer running the Receiving Plan was a steel stockholding company based several hundred miles away, and
- the Receiving Plan had only recently been established.
The Ombudsman took the view that the Council should have engaged directly with the member about the red flags, explained its concerns and pointed out the possibility that the Receiving Plan could be a scam. It was not enough to merely pass on a copy of the Scorpion Warning. The Ombudsman believed that if the Council had actively communicated the red flags to the member, it was likely that Mrs H would have changed her mind about proceeding with the transfer.
As a result, the Ombudsman ruled that "the Council's failure to recognise the correct legal position and, as a consequence, its failure to conduct further due diligence before making the transfer amounts to maladministration." It ordered the Council to reinstate Mrs H's benefits in the Fund, or to provide equivalent benefits, with certain adjustments. The Council was also ordered to pay Mrs H £500 for the distress and inconvenience she had suffered as a consequence of it not having undertaken proper due diligence before it made the transfer payment.
As well as reminding trustees of the level of due diligence required when considering transfers, the determination shows that establishing whether a member has an automatic right to a statutory transfer value can be challenging.
Before the case of Hughes v Royal London in February 2016, it had been understood that members wishing to transfer their benefits to an occupational pension scheme had to be in receipt of earnings from an employer of the receiving scheme. In Hughes, the Court ruled that being in receipt of earnings was sufficient to allow a transfer to go ahead. In the case of Mrs H, she was not in receipt of any earnings at all, something the Council failed to check.
Following the Hughes judgment, the Government stated that it would introduce a new requirement so that, where a member wishes to take a statutory transfer to an occupational pension scheme, a genuine employment link must exist between the member and the receiving scheme.
It is to be hoped that the issues raised by this line of cases will be addressed in the Pension Schemes Bill which was published on 16 October 2019. The Bill includes provisions amending the transfers regime but the detail will be set out in regulations.
Pending any change, trustees will need to ensure that they comply with the existing legislative requirements and case law, including Hughes. For past transfers, the Ombudsman's decision in Mrs H may lead to an increase in claims by former members whose benefits have been transferred out (or by a third party on their behalf) that appropriate due diligence was not undertaken by the transferring trustees.