Pension liberation schemes were "occupational", High Court rules, as HMRC tightens procedures

The Court had been asked to clarify the legal status of the schemes, which were linked to high-profile police raids targeting so-called 'pension liberation' schemes earlier this year. The judgment is significant because for the first time it clarifies the powers that the Pensions Regulator can use in relation to these schemes. The regulator has the power to investigate occupational pension schemes, and can appoint independent trustees to oversee schemes that do not comply with regulatory requirements.

The judgment was handed down on the same day that HM Revenue and Customs (HMRC) published details of enhanced checks to be carried out on occupational pension scheme registrations, intended to crack down on illegal pension liberation. Schemes will no longer be automatically registered once an online form is submitted to HMRC, but will instead be subject to "detailed risk assessment activity" before approval is granted.

Commenting on the case, Katharine Davies of Pinsent Masons, the law firm behind Out-Law.com, said that it was "surprising" that it had taken so long for the definition of an 'occupational' pension scheme to be tested by the courts in this way. Davies was part of the team that put together the legal case on behalf of Dalriada, the independent trustee of the affected schemes, which had been asked by the court to argue that the schemes should be classed as valid occupational pension schemes. The Pensions Regulator was asked to take the opposite position, in a case in which the two parties were not technically in dispute.

"These proceedings have been of huge interest to trustees and the wider pensions industry, and the decision helpfully clarifies this important issue," she said. "While clearly not condoning pension liberation, the court has recognised that the schemes involved are occupational. This by implication affirms the Pensions Regulator's capacity to appoint independent trustees to oversee dubious schemes."

In a pension liberation arrangement, money representing a saver's pension rights is transferred out of that person's existing pension scheme to a new scheme, which may be based offshore. the money is then made available wholly or partly as a cash payment back to the saver, while any funds remaining tend to be invested in exotic structures that do not live up to the advertised claims.

Schemes often work alongside 'introducers' or 'advisers', which try to entice members of the public through the use of spam text messages, cold calls or web promotions promising them the opportunity to release a portion of their pension savings as cash before the age of 55. Under rules governing occupational pension schemes, an individual can only claim pension benefits from the age of 55, unless doing so on ill-health grounds. Tax charges on unauthorised payments can be as much as 55% of the value of the payment if the scheme member is under 55.

The Pensions Regulator is currently leading a Government-backed campaign designed to raise public awareness of the risks of liberation schemes. Participating bodies include HMRC, the Financial Conduct Authority (FCA), Serious Fraud Office (SFO) and the Department for Work and Pensions (DWP).

In his judgment, Mr Justice Morgan said that whether the suspected pension liberation schemes were occupational pension schemes, as defined by the 1993 Pension Schemes Act, was a question of both "purpose" and "establishment". The first of these tests concerned the purpose of the scheme, rather than of those setting up the scheme, and should be considered objectively based on the scheme documentation, he said. In this case, the schemes met this test as the documentation had been drafted with the purpose of providing benefits as envisaged by the legislation.

On establishment, the judge said that although there was no evidence that the schemes were providing benefits to employees in the conventional sense at the time they were set up, the directors of the founding companies themselves were 'employed' by the founding companies even if they were not remunerated. It also did not matter that they were not actually members of the schemes. Bearing this in mind, the court did not need to decide whether the legislation required the founder to employ someone at the time the scheme was established.

As the judgment was being handed down, HMRC published a policy statement in relation to pension liberation on its website. Under the new policy, which takes effect immediately, HMRC will check all pension scheme registration applications before making a decision on whether or not to register the scheme. To help scheme administrators decide whether to transfer funds into a suspected pension liberation scheme, HMRC has also announced that it will respond to requests for confirmation of a scheme's registration status without seeking consent from the receiving scheme.

"Easy registration with HMRC was a significant weakness in the previous regime, so this is a welcome development," said tax expert Ian Hyde of Pinsent Masons. Hyde had previously said that HMRC should consider making sure that registration with it was a sufficient guarantee that schemes managed by registered providers were legitimate.

However, he noted that the policy change only applied to new registrations, and that HMRC had not said whether it planned to review existing registrations to the same standard.