For some time, trustees and providers have found themselves in a difficult position when faced with a transfer request which they have grounds for believing may be for the purposes of pension liberation. If the member has a legal right to transfer (either under statute or under the scheme's rules) then they must make the transfer. If the transfer would be a non-statutory transfer the trustees should ensure that they exercise any discretion they have appropriately in the circumstances.
One device used for pension liberation is the establishment of an occupational pension scheme with a shell employer. Trustees have generally approached requests for transfers to such arrangements with caution and have often refused transfers where the member was not able to evidence earnings with the shell employer on the basis that it would be a non-statutory transfer and may not be a recognised transfer for tax purposes. However, the recent decision of the High Court in Hughes seems likely to make it easier for individuals to insist on transfers to such arrangements.
Miss Hughes requested a transfer to an occupational pension scheme from her personal pension. The employer in relation to the new scheme did not appear to be trading. Miss Hughes had an agreement to receive remuneration from the employer but there was no evidence she had actually received any salary. The Pensions Ombudsman concluded that she did not have a statutory right to transfer and the provider was correct in refusing to make the payment. This was on the basis that Miss Hughes was not an "earner" in a relevant employment for the purposes of the receiving scheme. A statutory transfer to an occupational pension scheme must result in the member being given "transfer credits" in that scheme and "transfer credits" can only be given if the person is an "earner".
The crux of the case was whether "earner" in this context required Miss Hughes to have earnings from the scheme employer, or merely earnings from any source. The Ombudsman concluded that:
"Although, there is nothing in the legislation that expressly states that Miss Hughes' status as an earner had to be in relation to a scheme employer, I find that it did.... It would give the reference to "earner" arbitrary consequences if it just means a person with earnings from any source."
Miss Hughes appealed against this decision and the High Court has found in her favour. Morgan J held that the legislation does not require the individual to be an "earner" in relation to an employer under the rules of the receiving scheme but merely to be an "earner" in any context. Miss Hughes was an "earner" as she had earnings from another source. This meant that she did have a statutory right to transfer.
The Ombudsman has taken the rare step of issuing a statement on this decision:
"The Pensions Ombudsman Service has around 200 live cases which are affected by the ruling, so we welcome the clarity that it brings to those using our Service and to the industry generally.
In particular, it provides instruction to trustees and administrators that, assuming the other requirements for a statutory transfer right are made out, members do not need to be in receipt of earnings from an employer sponsoring the occupational pension scheme to which they wish to transfer their pension. Earnings from another source are sufficient.
It seems likely that most transferring members will meet this requirement so, beyond verification of earnings and the provision of risk warnings, trustees and administrators will be conscious that under current legislation they cannot refuse such a transfer – even if they have significant concerns that it may be for the purposes of pension liberation.
Members with similar complaints will benefit from the ruling but should note that providers may need to seek further information and wish to ensure the risks are fully understood, before a transfer is made."
To add another element to this difficult area, the Government has recently announced that new guidance is to be issued by the Pensions Regulator on "speeding up pension transfers" and that from the summer of 2016 there is to be a new requirement for schemes to report to the Regulator on the speed at which they are processing transfers against possible benchmarks or targets.
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.
