UK: Pension Liberation Update: High Court Cases Offer Cold Comfort To Trustees

Last Updated: 19 November 2013
Article by Michael Calvert and David Gallagher

In brief

Last week the High Court gave a judgment in two high profile cases which, it was hoped, would offer help to trustees struggling to navigate their way through competing claims where pension liberation is suspected - from members demanding transfers, on the one hand, and HMRC and the Pensions Regulator on the other.

One of the arguments trustees have used to justify not paying a member's statutory transfer to a scheme which they think is being used for pension liberation has been that the scheme is not a "proper" occupational pension scheme. Last week's judgment makes this argument more difficult in the future. By the same token, it also makes it more difficult for HMRC to argue that the transfer is an unauthorised payment where the scheme has been registered. But the judgment does little more. It remains the case that there is no clear protection for trustees who refuse to comply with a member's request for a transfer where they suspect pension liberation.

The statement from HMRC, timed to coincide with the judgment, that it will not automatically register new schemes before carrying out a risk assessment is welcome recognition by HMRC that it has an important role in making it harder for pension liberation schemes to operate. But more needs to be done. A power for trustees to refuse statutory transfer requests where they have reasonable grounds for suspecting pension liberation would be welcome.

In the meantime, trustees should review their transfer processes to ensure they are sufficiently robust to identify cases where pension liberation is a risk and undertake a higher level of due diligence in these cases. This will help protect members and also minimise the risk of a scheme sanction charge if a transfer is made which is later found to be an unauthorised payment.

In more detail

The two cases concerned nine pension arrangements in similar form to which the Pensions Regulator had appointed independent trustees. The Regulator's power can only be used in relation to occupational pension schemes. The purpose of the cases was to clarify whether the arrangements were, indeed, occupational pension schemes, an expression defined in pensions legislation. If the arrangements were not, the appointment of the independent trustees would be invalid and the Regulator would be deprived of a key intervention power.

The documentation of the schemes confusingly described them as both occupational and personal pension schemes. A scheme cannot be both. However, the Court decided that what was important was not what the schemes called themselves but whether the statutory definition of an occupational pension scheme was satisfied, as evidenced by the rules of the schemes taken as a whole, read against the background facts. The Court held that the definition was satisfied for all the schemes.

A key part of the definition is that the purpose of the schemes must be, at least in part, to provide benefits to or in respect of persons with service in a category of employment (for example, employees of a common employer). As long as this "purpose" test was met, it did not matter that benefits could also be provided to other persons. The Court decided that the intentions of those who established the schemes was not relevant to deciding its purpose (even if those intentions might include pensions liberation). The purpose had to be derived from the documents and surrounding facts on an objective basis (so that those who dealt with the schemes, such as trustees paying transfers to them, could identify their purpose).

This provides a modicum of clarity to trustees faced with a statutory transfer request where pension liberation is suspected, but the member insists on a transfer even after the risks have been drawn to his attention. It had previously been argued that, in such cases, the member does not have a statutory right to a transfer at all because the receiving scheme does not meet the purpose test for being an occupational pension scheme as it will have been set up for the purpose of pension liberation, whatever its rules say on their face. This argument is now much more difficult to run and will have to be based on showing that the whole scheme is a sham, a line the Pensions Regulator deliberately chose not to explore in these cases.

The lessons for trustees are limited. They continue to be subject to competing pressures from members demanding transfers, HMRC, the Pensions Regulator and their own duty to act in members' interests. Whatever their ultimate decision in relation to a particular transfer request, it is more important than ever that they should have robust procedures in place to provide the evidence to justify that decision. This will include seeking confirmation from HMRC that the scheme is registered, a status which HMRC will be more cautious in granting in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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