After Royal London lost the right to block a suspected pension liberations transfer in a landmark ruling, it could put trustees in a difficult position and endanger members, finds Rebecca Shahoud.
At a glance
- Judge overruled ombudsman's decision to block suspected liberation transfer
- Could put trustees in difficult position as may be unable to block transfers
- Solution is to change legislation to set up a list of approved schemes
A long-awaited High Court ruling on a suspected pension liberation case between Royal London and a scheme member could be disappointing for many trustees. From now on in many cases they will no longer have the right to block transfers to suspected fraudulent schemes.
In the Hughes v Royal London case on 18 January, Justice Morgan overturned the pension ombudsman's decision to block a transfer from Donna-Marie Hughes' Royal London pension plan into the Babbacombe Road 1973 small self-administered scheme (SSAS).
Royal London originally refused the transfer because the Babbacombe Road 1973 showed hallmarks of a suspicious scheme. However, trustees have a duty to carry out a member's transfer request where the legislative requests are met. In June 2015 when the case was taken to the ombudsman, he decided that Hughes did not have a legal right to transfer on the basis that she did not satisfy the test of being an ‘earner'. The ombudsman defined an earner as being in relation to the scheme.
But when the case was referred to the High Court through an appeal by Hughes, the judge disagreed with the ombudsman. Justice Morgan said an earner could be defined as such without being in receipt of remuneration from the employing scheme and therefore, Hughes had a statutory right to transfer.
Pinsent Masons pensions litigation partner and lead legal advisor to Royal London, Ben Fairhead said the interpretation of ‘earner' had proved to be a stumbling block in many pensions liberation cases.
More liberation scams?
"The ombudsman was trying to interpret legislation against a backdrop of quandary, and this highlights that there are gaps in the law. So, now people are going to have to accept that you can't have a kind of nanny state. If people want to make these transfers, notwithstanding warnings, then there is an argument that it is a good outcome for the industry, as it removes the trustee's burden."
Fairhead adds that the flipside is more money will probably end up going into scams, however.
The judge's decision has disappointed many people in the industry.
LCP senior consultant Tony Bacon says it puts trustees in an "impossible position" and endangers savers. He is concerned that trustees will have to allow members to transfer their cash to potentially fraudulent schemes, despite the warning signs.
Linklaters associate Geoff Egerton says the judge's decision gives members "the right to make bad decisions" but acknowledges the difficulties faced by trustees who will not be able to act on suspicion.
However, Egerton believes that the ruling will only apply to transfers that concern the issue of earners. The ombudsman currently has a number of liberation cases on hold pending the outcome of the Hughes v Royal London case. In fact, according to Burges Salmon, one in seven complaints to the ombudsman are suspected pensions liberation cases.
This ruling shifts the burden of responsibility to the member. Although trustees may be uncomfortable with having to allow certain transfers, their duty is now limited to ensuring members are signposted to pension liberation material such as The Pension Regulator's scorpion literature.
Implications for trustees
However, Taylor Wessing partner Mark Smith thinks that in years to come the blame might come back to the trustees.
"It could be ten to 15 years until we see the true effect of the decision. And it could be that those who have been allowed to transfer their accrued funds come back to the trustee that they deem responsible," he said.
LCP's Bacon adds: "This is completely unacceptable. It is time that the DWP acted and legislated so that trustees can say ‘no' where there are obvious red flags, such as ‘lifetime storage pod' or Cape Verde timeshare investment opportunities or unregulated introducers involved. It would not be difficult."
The introduction of pension freedoms last April has brought to light many issues involving trustee responsibility, such as whether they had the right to block certain transfers.
Egerton says this is not the end of the story. "There is still this tension between trustees with paternalistic impulses and members with the right to do whatever they want with their pensions. Unless there's a better solution, trustees' responsibility will still remain an area of uncertainty.
He believes one solution is for HM Revenue and Customs (HMRC) to approve a transfer list, where schemes are only allowed to transfer if they are on the list. A scheme would be subject to proper checks in order to get onto the list.
Egerton says: "It may be time for legislation to be brought in under which HMRC maintains a list of approved transferee schemes. Statutory transfers would then only be permitted to schemes on that list, having satisfied the HMRC that they are not pensions liberations vehicles.
"This would simplify the job of trustees as it would remove the burden of determining the legitimacy of receiving arrangements," says Egerton.
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