The Pension Protection Fund will be allowed to pay compensation to the victims of some pension scams, after a High Court judge ruled its Fraud Compensation Fund would apply to schemes used for pension liberation.
The PPF and trustee company Dalriada, which has been appointed to take over several suspected scam schemes by the Pensions Regulator, went to court in July with a test case designed to confirm the PPF’s legal duties and ability to help scam victims.
The FCF was created by the Pensions Act 2004, and was set up specifically to support pension schemes that have suffered losses through acts of dishonesty.
While the PPF has been collecting a fraud compensation levy during the past few years for the FCF — £4.3m in 2018 and £4.8m in 2019 — it did not pay out on any claims in 2019.
This is a positive outcome and, on behalf of the several thousand members whose interests Dalriada represents as a trustee, we are pleased that the court has provided such a clear and comprehensive judgment
Sean Browes, Dalriada
Its latest annual report stated: “While there have been significant claims relating to pension liberation cases, the eligibility of the claims and the FCF’s liability remains unclear.”
This lack of clarity, according to the court, centred around the relationship a company must have with individuals to be deemed an employer for the purposes of the 2004 law, whether a “sham” scheme could later be considered an occupational scheme, whether an employer would need defined benefit-style liabilities to members to qualify, and which specific losses suffered by schemes might be capable of being compensated by the FCF.
Clarity received
But in a judgment released on November 6, Mr Justice Trower provided clarity, finding that any occupation scheme liable to pay the levy charged in respect of the FCF should stand to benefit from the fund if members have been the victims of dishonesty, whether or not the people running the scheme were ‘employers’ with in the traditional sense with paid employees. The judgment therefore applies to both defined contribution and defined benefit arrangements, but personal pension scheme scams are not covered.
He also ruled that “liabilities” had a sufficiently wide definition to allow a scheme failure notice, a prerequisite for FCF payments, to be issued for the liberation scheme considered in the test case.
Ruling on the activities that improperly reduce members’ benefits and might therefore be due compensation, the judge said costs borne by new trustees in investigating the scheme’s history, administration costs incurred above and beyond normal costs as a result of the scheme being irregular, and tax charges incurred as a result of unauthorised payments, could all be considered.
150 schemes in the wings
The judgment opens the FCF to claims from similar schemes. Seven applications have been received so far, totalling £43.6m. But in his judgment, the judge pointed to PPF evidence that far larger volumes may claim in future — a further 150 claims are yet to be made, with a value of around £240m.
“This is a positive outcome and, on behalf of the several thousand members whose interests Dalriada represents as a trustee, we, Dalriada, are pleased that the court has provided such a clear and comprehensive judgment,” said Dalriada senior trustee representative Sean Browes in a statement.
Turnberry victims should get help
The test case brought by Dalriada and the PPF concerned Turnberry Wealth Management. Set up by Margaret and Martin Brown in 2013, court documents describe how members were “induced” to transfer their pensions in, on the promise of receiving loans backed by their benefits.
“Although it seems some money was liberated to members who received purported ‘loans’, the majority of the benefits appear to have been lost,” a witness statement read. The judgment stated that more than £2.5m of the £3.3m paid into the scheme was transferred to a British Virgin Islands shell company, with the intention of constructing and running a large bioethanol plant in Grimsby.
“The evidence indicates that the shares in Elysian are now worthless and Dalriada contends that the investment was used as a means to facilitate dishonest pension liberation,” the judgment reported.
A large part of Mr Justice Trower’s ruling concerned the status of individuals involved in liberation schemes as “employers”, with many fraudsters not having had paid up employees in the traditional sense. In fact, Turnberry had six employees at one point, but the judge still opted to clarify that anyone expected to pay a levy to the FCF, having set up a scheme, would have members eligible for FCF protection.
“The PPF has conducted the case in the spirit of clarifying the scope of the FCF rather than seeking to minimise claims on the FCF, and we are grateful to them for bringing this claim, which has allowed these crucial issues to be clarified. We are also grateful to the secretary of state for her participation in the case.”
A PPF spokesperson said: “The court has given us clarity on the core principles that apply when considering eligibility for the FCF and the amount of compensation payable from it to members of scam pension schemes. We’ll now work with the trustees of this scheme and trustees of other similar schemes to process the applications that were waiting for the court’s decision.”
While the judgment opens up the prospect of compensation for members who have been duped in pension liberation schemes, it is not yet clear that all current and future applicants will receive payouts.
Ben Fairhead, a partner at Pinsent Masons, which advised Dalriada, said: “Working closely with the PPF we’ve gained helpful clarification from the court on the legislation governing the FCF. But there is clearly some way to go to work through applications by individual schemes.”
