 By Matthew Swynnerton, Pensions Partner, DLA Piper
Dealing with requests from members to transfer out their scheme benefits has become a more complex task for trustees recently because of the issue of pension liberation.
Pension liberation involves individuals being encouraged to transfer out their pension savings on the promise that the receiving scheme will allow them to access their savings before age 55, when in fact members will usually incur a substantial tax charge, which is often not made clear. The new scheme will also often impose high fees on the member.
The dilemma for trustees
If the receiving scheme is suspected of pension liberation, trustees face a difficult decision.
• If they block the transfer they could be in breach of a statutory duty to implement a request for a transfer to an occupational or personal pension scheme within six months and therefore face regulatory action. The member may also complain to the Pensions Ombudsman.
• If the trustees make the transfer and the receiving scheme turns out not to have been a valid occupational or personal pension scheme, the trustees will not benefit from a statutory discharge. This would result in the risk that the member (or any contingent beneficiaries) may still try and claim benefits from the scheme. Trustees may also feel uneasy making a transfer given their trust law duty to act in the member's best interests.
Member awareness
A key activity for trustees is ensuring members are aware of this issue in order to try and prevent such requests from being made in the first place. When a member first requests information about making a transfer, the trustees should therefore include information warning members of the risks of pension liberation, such as the Pensions Regulator's 'scorpion' literature.
Look out for warning signs
If a transfer request is received, trustees should be vigilant for warning signs that the receiving scheme might be involved in pension liberation. These include: the scheme has been recently registered; the member pressuring the trustees to carry out the transfer quickly; the scheme is sponsored by an employer that does not employ the member; and an increase in requests for transfers to this particular receiving scheme.
Checks on the proposed receiving scheme
There are various checks that trustees can complete to investigate the receiving scheme further.
• Contact HMRC for confirmation of the receiving scheme's status. In October HMRC changed its processes so that it will now respond either: (i) by stating that the scheme is registered and the information it holds does not indicate a significant risk of the scheme being set up or used to facilitate pension liberation; or (ii) by stating that one or both of these conditions is not met and HMRC is therefore unable to provide the confirmation requested. It is important to remember that this should not be the only check that trustees complete and receiving response (i) does not mean that HMRC has endorsed the transfer.
• Ask the receiving scheme for more information, such as, a copy of its governing documentation and confirmation of its legal status. This is to try and ascertain whether the scheme is a valid occupational or personal pension scheme and therefore whether the statutory duty to transfer applies. There is uncertainty for trustees on this point because even though a court case in 2013 concluded that nine schemes suspected of involvement with pension liberation were occupational pension schemes, this conclusion was reached solely on the construction of those schemes' documents and the court did not consider the question of whether the schemes were shams.
• Ask the member for more information to ascertain whether there are any other warning signs, for example, that the member became aware of the scheme through unsolicited text messages. At the same time, the trustees should provide more information to the member about pension liberation to ensure the member is aware of the risks involved with the requested transfer.
Making transfer decisions
Unfortunately there is no definite or risk-free answer as to what trustees should do if the member still wants to proceed with the transfer.
If trustees block a transfer, they may believe they can take comfort from the fact that the Regulator has stated that evidence of concerns of pension liberation will be a relevant factor when it decides whether or not to take action for breach of the statutory duty. However, the Regulator states that it cannot predetermine any future regulatory action it may take and, even if the Regulator does not take action, the member may still complain to the Pensions Ombudsman. The Ombudsman's views on the dilemma trustees face is not yet known, with determinations awaited in a number of cases.
If the member is insistent on making a transfer, trustees may decide there is a lower risk of member complaint by making the transfer, however they should ask the member to sign a robust bespoke discharge before doing so. However, this too is an imperfect solution because a non-statutory discharge will not protect schemes from claims from contingent beneficiaries.
Conclusion
In practice, decisions in relation to transfers will be a question of balancing the factors in each case and ensuring that there is an audit trail. There will, however, be risks involved whether trustees block or allow transfers, and trustees should obtain legal advice before deciding how to proceed.
|
