UK: And Then There Were Three

Last Updated: 18 February 2015
Article by Marcus Kealey

After a period of quiet, three recent determinations of the Pensions Ombudsman relating to pension liberation have (like buses) come along all at once...

We are on the eve of major changes to the ways in which members of defined contribution pension schemes can access their pension benefits: the genesis of a new world of retirement saving. Meanwhile there are growing concerns as to how members will avoid falling victim to pension scams, with the attendant risk of the loss of some or all of their pension benefits.

Last year the Pensions Ombudsman ("PO") saw a sharp increase in the number of pension liberation arrangements brought before it. More recently, in January this year the PO issued a statement1 regarding three further determinations2 connected with pension liberation. Here we consider those recent determinations and examine some the legal issues regarding statutory transfer requests. We also take a look at some of the steps that regulatory bodies are taking to tackle pensions fraud.

Statutory transfers

Sections 94, 95 and 99 of the Pension Schemes Act 1993 ("PSA93") set out the statutory right for members of occupational and personal pension schemes to request a cash equivalent transfer value of any benefits which have accrued under the transferring arrangement. Members' requests must be made in writing to the trustees or managers of the scheme and include a direction as to how the cash equivalent should be applied. Of the permitted directions a member can make, the most salient are that the cash equivalent be used:

  • either for the acquisition of transfer credits in an occupational pension scheme; or
  • for acquiring rights under a personal pension scheme.

The PO's determinations

In two of the recent determinations, Jerrard and Kenyon, the key issue was whether the receiving scheme fell within the definition of an occupational pension scheme which had been considered in the Pi Consulting3 case. In Pi, Mr Justice Morgan considered that a scheme would constitute an occupational pension scheme provided it satisfied two tests:

  1. the "purpose" test – in other words, was the scheme established for the purpose of providing benefits to, or in respect of, people with service in employments of a description?
  2. the "founder" test – whether the scheme was established by (or by persons who included) a person to whom Section 1(2) PSA93 applied when the scheme was established?

In Jerrard, the receiving scheme was found not to satisfy the purpose test because the scheme's governing documentation failed to specify a clear category (or employments of a description) of the individuals for whom the scheme was to provide benefits. The PO also considered that the scheme failed to satisfy the founder test because there was no apparent link between members' employments and the founder company. Accordingly, the receiving scheme was not an occupational pension scheme which meant that the member's statutory right to transfer her benefits fell away.

By contrast in Stobie the PO arrived at the same conclusion but by a different path. He found that the receiving scheme was, in this case, an occupational pension scheme which satisfied the purpose and founder tests. However, he also focused on the meaning of the words "transfer credits" in Section 95(2) PSA93, these being what Mr Stobie was looking to acquire in the new scheme with his transfer payment.  "Transfer credits" are defined as rights allowed to an "earner" under the scheme rules. In turn, earners are defined as individuals "...deriving remuneration or profit from an employment". In effect, the PO required that the reference to employment should not be read as being to "any" employment, but rather to employment with the scheme employer. On the particular facts Mr Stobie had failed to establish that he had relevant earnings with the receiving scheme's employer, and therefore could not require his cash equivalent transfer value to be paid to that scheme.

Wedlake Bell comment

Whilst these determinations demonstrate that the PO is taking cases of potential pension liberation seriously, the outcomes are based on the technicalities of the underlying legislation which the various schemes' administrators appeared to be unfamiliar with. It is hoped that the determinations will assist scheme managers and administrators in achieving the correct result using the correct decision-making process. However, even if the correct process is applied, if the legal requirements for a statutory transfer are met there are no other means by which a scheme can prevent such a transfer from taking place. At best all that its administrators can do is warn the member of the implications before the transfer is implemented.

As to what steps the regulatory authorities are taking to combat pension liberation, there have been several recent developments.

  • On 4 February, HMRC published its pension liberation newsletter in which it confirmed that from 6 April 2015, HMRC's online scheme registration process will ask additional questions of scheme administrators with the possibility of them having to provide further information and documentation before a scheme can become tax-registered. 
  • In addition, back in December 2014, consultation took place on draft regulations intended to effect changes to the Registered Pension Schemes (Provision of Information) Regulations 2006 (SI 2006 No. 567). The changes will require scheme administrators to disclose changes to a scheme's legal structure or membership size in HMRC's annual event report. It is expected that these changes will also have effect from this April.

Time will tell whether the steps being taken will prove to be sufficient...


1.Pension Liberation Update – 9 January 2015

2.Mrs Sharon Jerrard (PO-3809), Mrs Diane Kenyon (PO-1837) and Mr Gregory Stobie (PO-3105)

3. Pi Consulting v The Pensions Regulator [2013] EWHC 3181 (Ch)

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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