Why trustees are caught in the middle on pension liberation

Such trustees face several, sometimes conflicting, requirements of legislation and good practice. 

First, deferred members meeting certain conditions have a statutory right to transfer out to another registered scheme, or to certain overseas schemes. This must usually be carried out within six months of the request being made.

The establishment of an industry-wide group to prepare a code of practice is very welcome

The pensions ombudsman has previously found trustees guilty of maladministration where transfer requests have been implemented within the statutory deadline but, nevertheless, more slowly than it has considered appropriate.

Trustees do benefit from a statutory discharge in relation to the transferred-out member – but only if they have taken all reasonable steps to ensure that the trustees or managers of the receiving scheme are acting in good faith in relation to the scheme. 

There has also been no requirement for a person to be authorised before they may establish an occupational pension scheme and register it with HM Revenue & Customs.

Further, as a member of an occupational scheme no longer needs to be – or previously have been – an employee of a participating employer, it is easier for those running fraudulent schemes to target members.

Trustees are also constrained from giving financial advice to members wishing to transfer out unless – most unusually – they themselves are authorised under financial services legislation.

The Budget did include provisions making it easier for HMRC to refuse to register new pension schemes, or to deregister existing schemes. There will also be a new requirement that a scheme administrator should be a fit and proper person.

Anti-fraud campaign

The Pensions Regulator’s ‘scorpion’ campaign last year recommended various steps trustees facing a transfer request could take, and provided useful information and warnings.

HMRC’s change of process in October was beneficial – a scammer can no longer register an occupational scheme before it is checked by the revenue, stopping them claiming that it is a genuine registered scheme and seeking to push through transfers before HMRC catches up and removes its registration. 

It is also helpful that the revenue will respond to a query about a transferee scheme without its consent. 

However, all transferring trustees will be told is either that a scheme is registered or that it does not meet one or both of the conditions of first, being registered and second, of HMRC not holding information to suggest significant risk of the scheme being used for pension liberation. 

HMRC makes clear that confirming a scheme’s registration status should not be the only check that a scheme carries out and relies on.

At the time of writing, determinations were awaited from the ombudsman in 41 pension liberation cases. The cases are understood to relate to claims both that transfers were wrongly blocked by trustees and that the trustees should not have proceeded with transfers to schemes subsequently used for pension liberation. 

The pensions industry has been aware of these outstanding cases for several months and the continued delay has left trustees in a state of limbo. Hopefully, the release of some or all of the determinations will give trustees clarity, at least as to how the ombudsman views such cases. 

Protecting decisions

Of course, the ombudsman’s view may not coincide with that of the regulator, HMRC or the Department for Work and Pensions. 

Having given out regulator information, asked appropriate questions, verified a scheme’s registration status and persuaded the member to sign a suitable discharge, trustees may still have concerns that a member is a likely victim of pension liberation fraud.  What to do then?

Ultimately, trustees with an adamant member insisting on taking a transfer to a suspicious scheme must decide themselves: do they block or proceed with a suspicious transfer? At present, either route could lead to a complaint to the ombudsman and, potentially, regulatory action.

The establishment of an industry-wide group, apparently with the blessing of the DWP, to prepare a code of practice on dealing with pension liberation requests is very welcome. 

Even though without legislative change the code would have no legal effect, a process and standards agreed by the industry would give considerable comfort to trustees. 

Much better would be a ‘safe harbour’ provision – that if trustees carry out certain steps they will not subsequently be susceptible to claims by the member, regulator or HMRC.

For too long, trustees have been left between a rock and a hard place on pension liberation – let us hope the new code will provide much-needed relief.

Jill Clucas is of counsel at law firm Hogan Lovells