UK: Pensions Ombudsman: Law Trumps Regulatory Guidance

Last Updated: 30 April 2015
Article by Elmer Doonan, Jay Doraisamy and James Borshell


"Classic" pensions liberation involves transferring pension savings from a legitimate pension scheme to a scheme which provides access to those savings in a manner that is not permitted under a legitimate pension scheme and will lead to additional tax charges and penalties. The end result of a pensions liberation scam tends to be that most of the member's transferred pot ends up either with the person who set up the pension scam or with HMRC as unauthorised payment tax charges.

The Pensions Regulator and the FCA have been at pains to warn schemes in their respective bailiwicks to be on the lookout for pension transfer requests that could be linked to these scams. However the legal position makes life difficult for pension providers dealing with transfer requests and this case highlights the problems they face.

What triggered the Case?

Mr. Harrison requested a transfer out of his Prudential personal pension scheme (the Prudential Scheme) to the Cheshire Food Services Pension Scheme (the Receiving Scheme). The Receiving Scheme was a small self-administered pension scheme (SSAS). Under this type of scheme each member is a trustee and therefore the members have more options on how they invest their pensions pots. These schemes are entirely legal.

Prudential conducted some checks based on the Pensions Regulator's pensions liberation checklist (the liberation checklist), and queried the Receiving Scheme's data protection registration. 

Although it received responses from the administrators of the Receiving Scheme, Prudential refused to make the transfer. Unhelpfully, it did not at first tell Mr. Harrison this. When Mr. Harrison chased his transfer request Prudential treated this as a complaint and gave him some rather generic reasons based on the liberation checklist for refusing to pay the transfer:

  • Mr. Harrison's age (he was under 55).
  • The scheme administrator had only recently registered the Receiving Scheme with HMRC.
  • The scheme administrator was also recently registered as a company. 

Unsurprisingly, Mr. Harrison was not happy with this response and made a complaint to the Ombudsman asking that it order Prudential to complete the transfer.

What is the law?

Mr. Harrison had two potential routes to a transfer. First he had rights under pensions legislation to a cash equivalent transfer value (a CETV) where certain requirements were met. The second was through the scheme's own transfer rule. This took effect as a contractual obligation on Prudential under which Mr. Harrison could direct Prudential to transfer his rights to another registered pension scheme. 

What did Mr. Harrison argue?

Mr. Harrison's case was simple. Prudential gave no valid reason for refusing the transfer. The Receiving Scheme was not a pensions liberation scam and he had made an informed decision to transfer. Mr. Harrison had been appointed a trustee of the Receiving Scheme and he wanted Prudential to comply with his request.

What did Prudential argue?

As well as the points it raised in its rather lacklustre original notice to Mr. Harrison, Prudential argued that:

  • Mr. Harrison was not an employee of an employer in the Receiving Scheme and it was unusual that he would join it without such employment.
  • The trustee of the Receiving Scheme was not registered with the Information Commissioner's office.
  • It had never heard of the scheme administrator and it did not have a website or membership of the Association of Member Directed Pension Schemes (a trade association for SSASs).
  • It had seen no proof the scheme administrator had been appointed properly and, therefore,  if the administrator was not properly appointed then the Receiving Scheme was not registered properly with HMRC.
  • It had seen no proof that Mr. Harrison was a trustee of the Receiving Scheme as required of a SSAS.
  • Prudential had to comply with its regulatory obligations including the Regulator's guidance as the FCA principles required it to co-operate with regulators generally.

We have set these arguments out at length as they availed Prudential not one jot.

What did the Ombudsman decide?

Mr. Harrison's request did not meet the requirements for a CETV. The Ombudsman chose to interpret the test to include a requirement for the transferring member to be receiving remuneration from a scheme employer. In this case there was none so he wasn't an earner and had no right to a CETV.

It did however meet the very limited requirements for a transfer under the scheme's rules. The Regulator rapped Prudential's knuckles for requiring Mr. Harrison to prove that he should be allowed a pension transfer and not asking for information the absence of which they then relied on as the basis for refusal. 

The Ombudsman ordered Prudential to pay the higher of the current transfer value of Mr. Harrison's pension pot and what he would have had on the date he originally requested the transfer plus statutory interest to date. Interestingly, the Ombudsman did not order any additional payment for distress or inconvenience.

What does this mean for pension providers?

This case highlights the basic problem pension providers face with potential pensions liberation transfer requests. The Ombudsman stressed that legal obligations will always win out over regulatory suggestions. If a member's  transfer request meets the CETV requirements, the pension provider must pay the transfer, even if it is with gritted teeth and a copy of the pensions liberation scorpion leaflet attached. If the scheme has a transfer provision that says the member can direct payment, the member can direct payment and again, subject to meeting the rule's requirements, the provider will have to pay.

That's not to say that there's nothing that providers can do in these situations. Part of the problem for Prudential in this case was that it did not do a thorough investigation of the Receiving Scheme. Had it done so it may well have decided to make the transfer payment rather than "fail safe", which may work with discretionary powers but does not work with mandatory contractual rights. 

We have set out a few of the key points for providers from this case below. 

Appendix: some headline points for providers 

  • Legal rights trump regulatory guidance: in this case the provider relied on guidance instead of considering its legal obligations. Always check that the requirements for a statutory and a scheme transfer power are met.
  • If you are going to refuse to make a transfer, make sure you have a legal reason for doing so. Do not rely on the absence of information you haven't asked for, and remember that in most cases the onus will be on you to show that a transfer should not be made. 
  • You are not HMRC. If you have doubts over a scheme's registration raise them with HMRC rather than simply treating it as if it were not properly registered.
  • If a power in the scheme rules is discretionary, remember that you need to exercise that power in a reasonable manner, taking into account all relevant and no irrelevant considerations.
  • Just because someone is under 55, it doesn't mean they are necessarily looking to sneak their money into a liberation scam. That could be age discriminatory!

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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