Pension freedoms introduced in April 2015 have had a generally positive effect, but have also created more ways for scheme members to squander their savings. A High Court ruling in a dispute between Royal London and pension scheme member Donna-Marie Hughes removed one of the most effective technical reasons for providers and trustees to decline a transfer and combat scammers.
The High Court's judgment
The decision in the Royal London case arose because the major providers of pension schemes had been doing their best to combat pension liberation scams. This meant undertaking due diligence in line with the industry code of practice, and acting appropriately when warning signs emerged. If those warning signs were present, the transfer had generally been declined.
In 2015, the Pensions Ombudsman identified the need for a technical basis for declining a transfer, not merely a suspicion that the receiving scheme was a scam or going to be used for pension liberation. The ombudsman's analysis had to address in particular the status of occupational pension schemes and especially one-person occupational pension schemes (SSASs), which are currently perceived as one of the commonest models for facilitating pension liberation. The ombudsman came to the logical conclusion that there must be some kind of employment relationship associated with occupational pension schemes that receive transfers - otherwise, the label 'occupational' looks somewhat misleading.
However, pensions law is not always framed in the most logical way – and in this case, the law predates the construction of pension liberation scams. When the High Court tested the Pensions Ombudsman's analysis in the Hughes v Royal London case, it found the law wanting.
The labelling of occupational pension schemes does not quite match the technical reality. The basic test for a scheme to be classed as an occupational pension scheme is relatively easily achieved by careful drafting of the scheme deed and rules.
It also turns out that there is no need for an employment relationship in relation to the receiving 'occupational' scheme. Provided that the saver has earnings from somewhere, the scheme set up to receive the transfer is 'occupational'. On this basis, providers of pension schemes and trustees will be left with little choice but to process a transfer - even if alarm bells are ringing.
What are the consequences?
The High Court's judgment has immediate consequences for savers, providers and trustees – as well as the authorities seeking to protect savers and crack down on pension scams.
- Savers are now freer to make bad transfer decisions. They need to be careful about how they exercise their rights. When something appears too good to be true, it probably is.
For providers and trustees
- Providers and trustees no longer have an important technical and legal basis for declining transfers. That is not to say other technical reasons do not exist for refusal. There will still be circumstances in which there is no clear transfer right, in particular because it cannot be established that the receiving scheme is 'occupational'.
- The due diligence process will need to shift focus and consider various scenarios where transfer rights exist, and where they do not. Those faced with transfer requests need to get this right, or risk facing action against them if it all goes wrong.
- Since the onus is on savers to look after themselves, providers and trustees should make sure that savers are equipped to do so. This means providing information and raising awareness about pension liberation scams.
- That aside, the position for providers and trustees has now simplified considerably. If the saver is an 'earner' in some capacity, and provided that the scheme meets the relatively simple test for an occupational pension scheme, there will be a statutory right to a transfer. Any statutory transfer is accompanied with a statutory discharge. This means that, in theory, the provider or trustee should be in the clear - at least as far as comeback from the individual saver is concerned.
- A full paper trail will be important in this fast-evolving area, so that providers and trustees can guard against future allegations of maladministration by showing that they have warned the saver where there are concerns about risks of a scam. Ultimately, however, the saver has a clear legal right to proceed if intent upon doing do.
- This decision arguably makes it more difficult for HM Revenue and Customs (HMRC) to argue that a transfer on the above basis is an unauthorised payment for tax purposes. However, such are the complexities of the inter-relationship between tax and pensions law that this remains unclear. HMRC operates in a different sphere and could conceivably seek to levy a tax charge in relation to a transfer, even if the provider or trustee has concluded that there was a statutory right to transfer.
The ruling potentially paves the way for many more transfers to questionable schemes. Managing savings and planning for retirement is far from easy, with an unwise transfer being just one of the many poor decisions that savers can make. Pensions are ever-changing and complex, and savers are unaccustomed to making decisions for themselves. The whole system of auto enrolment that underpins workplace saving relies heavily on apathy and default investment. Although Pension Wise now exists to assist with retirement decision making – and help savers spot scams – it still relies heavily on savers reading and understanding packs and warnings they are provided with. For many, this is too big an ask.
What the UK needs is the growth of quality, low-cost advice and guidance solutions in the workplace to get people engaging with their savings from the outset - not just at retirement. This will enable better decision making, potentially based on personal recommendations, to stop things going pear-shaped. Providers and advisers have a role to play here - but we also need the regulators, the Pensions Regulator and the Financial Conduct Authority (FCA), to create an environment in which IT-based and other solutions of this type can flourish.
Policymakers have so far rejected calls for improved legislation in order to better protect savers - although, to be fair, there is no consensus on what 'better' law would look like. It is also difficult to tell whether and to what extent HMRC has used its now not-so-new powers to close down any business that has the whiff of liberation about it.
This means that we could see a battle of wills in the month ahead in order to determine who is better placed to tackle pension liberation scams.
Tom Barton and Ben Fairhead are pensions law experts at Pinsent Masons, the law firm behind Out-Law.com.