UK: Pension Liberation: Combating The Infiltration

Last Updated: 23 February 2014
Article by Alison Hills

In our July 2013 e-bulletin we discussed whether we were becoming a Liberation Nation. It's a new year but how have things changed in relation to the dangerous practice of releasing funds from occupational pension schemes using unauthorised arrangements.

What is pension liberation?

Pension liberation is a practice which has been causing great concern within the pensions industry.  Rogue funds tempt members to transfer their pension benefits with the promise that after doing so the individual will be able to circumvent many of the restrictions placed on taking their benefits, for example they may be promised access to their benefits before attaining age 55.  Under the Finance Act 2004 such a payment would generally be an unauthorised payment.  The consequence of an unauthorised payment is an unauthorised payment charge of up to 55% although this is often not disclosed to the individual before they decide to transfer their benefits.

In October 2013 the High Court handed down its ruling following the case of Pi Consulting (Trustee Services Limited) and Dalriada Trustees Limited v TPR and others.

Pi Consulting and Dalriada Trustees had been appointed by the Pensions Regulator to administer nine pension arrangements which had been previously the target of a police raid concerning pension liberation.  These nine arrangements had received individual transfers from various workplace pension schemes.  Following their appointment as administrators of these arrangements, Pi Consulting and Dalriada Trustees brought a High Court case to clarify whether the arrangements in question were in fact occupational pension schemes under the Pension Schemes Act 1993.  In October 2013 the High Court handed down its ruling.

The Court decided that there were two key issues to focus on:

The purpose issue:  Was the scheme established for the purpose of providing benefits to, or in respect of, people with service in employments of a description or for that purpose and also for the purpose of providing benefits to, or in respect of, other people?; and

The founder issue: Was the scheme established by, or by persons who include, a person to whom section 1(2) of the Pension Schemes Act 1993 applied when the scheme was established (broadly, where there is an employment relationship)?

Both tests should be satisfied in order to be deemed an occupational pension scheme.  In this case the judge found that the arrangements were in fact occupational pension schemes for the purposes of the Pension Schemes Act 1993:

The purpose issue:

  • Looking at the substance (rather than the labels) of the arrangements he found the arrangements satisfied the purpose issue

The founder issue was then subdivided into two further questions:

  • Does the founder (i.e. the sponsoring employer of a scheme) have to employ a person of the relevant description at the time when the arrangement was established?  And, if so:
  • Did the founder in this case employ such a person at that time?

The judge found that in this case there was at least one individual in an employment relationship with the founder at the time the arrangement was established.  As the second of the sub-issues was satisfied the judge did not elaborate as to whether satisfying this point was in fact necessary.  He did, however, say that in his view the legislation does require an employment link of some kind at the time of establishing an occupational pension scheme.

Why was this judgment so important?

If these arrangements were found to not be occupational pension schemes for the purposes of the Pension Schemes Act 1993 then they would have been outside of the Regulator's remit and as such the appointment of Pi Consulting and Dalriada Trustees would have been invalid.

What does this mean for the future?

For the nine schemes in question: now it has been clarified that they fall within the Regulator's jurisdiction (because they are occupational pension schemes) these schemes are likely to be investigated by the Regulator to see whether they are sham arrangements for the purposes of facilitating pension liberation.

The Regulator issued a statement following this judgment stating that it has "a suite of powers we can use to disrupt pension liberation fraud including suspending and prohibiting trustees, appointing independent trustees to schemes to protect assets, freezing bank accounts and repatriating monies".

For other such schemes: the way in which the purpose and founder issues are applied means each arrangement will need to be assessed in relation to its own circumstances.

Those working in the pensions industry should remain vigilant and carry out the analysis recommended in the Regulator's action pack:  However, difficulties remain for trustees and administrators who conclude that a member may be being tempted to transfer their benefits to a sham arrangement.  This month the Pensions Ombudsman is investigating 41 pension liberation complaints, many of which concern trustees delaying or attempting to block transfers to arrangements which they suspect may be sham arrangements.  There remains little guidance for Trustees as to how they should deal with such cases.  Hopefully the Ombudsman's awaited determinations, some of which are expected to be published in March 2014, will provide trustees with some guidance.  Until there is greater clarity on this situation, trustees should take legal advice where they have genuine concerns about a proposed transfer.

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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