 By Ben Fairhead, Senior Associate at Pinsent Masons & member of the Pension Liberation Industry Group
We have just slipped past the first anniversary of the Valentines Day launch of the "scorpion campaign", led by the Pensions Regulator, to raise awareness of pension liberation. As we do so, it is worth reflecting on whether we are any closer to stemming the flow of pension funds into suspected liberation outfits. One of the main developments during the past year has been a landmark case before the High Court considering whether set-ups used to liberate pension funds properly constituted occupational pension schemes at all.
High Court case
It was back in May of last year that Dalriada Trustees and Pi Consulting raised the question of whether certain liberation-suspected schemes, to which they had been appointed by the Pensions Regulator, might not be occupational pension schemes. This question arose out of inconsistent references in the scheme documentation. That, coupled with the establishing employers seemingly having an absence of employees, gave rise to sufficient doubts to merit determination by the Court.
The resulting decision in October last year was deliberately kept as focussed as possible upon the schemes before the Court. However, it does indicate that liberation-suspected vehicles are likely to constitute occupational pension schemes.
In essence, the Court found that the critical test was whether, based on the language of the scheme documentation itself, the purpose of the schemes fitted with that for occupational pension schemes – not what the actual intention was of those setting up the schemes, an unattractive prospect for an industry already feeling overburdened with the need to carry out extra due diligence. The schemes concerned met that test.
As regards employees, it was sufficient that the establishing employer of each scheme had a director in order to meet the requirements of the legislation. Given that every establishing employer that is a limited company must have at least one director at the point of incorporation, the perception that an occupational pension scheme needs a conventional employment nexus between members and employer has effectively disappeared.
The upshot of the High Court's decision is that it did not help those hoping for a legal justification for blocking prospective transfers into liberation-suspected vehicles claiming to be occupational pension schemes. These set-ups are largely likely to remain occupational pension schemes, even without employees and even if the intention of those establishing them is simply to facilitate release of pension funds to members.
Evolving nature of pension liberation
The problems facing the industry have been compounded by the evolving way in which the protagonists behind pension liberation schemes are going about their business. Operations have become more sophisticated plus take advantage of the desperation of individuals to extract cash from their pensions. Accordingly, members are told to "keep quiet" about the "loophole" being exploited that apparently entitles that scheme to release cash from pensions. Some go further and ask the members to sign zero-hours employment contracts to create a fake façade of employment.
The industry is faced with the ultimate problem now that the public has significantly increased awareness of the risks of pension liberation but there are enough individuals out there who would prefer to receive cash now and worry later about what might be left of their retirement income.
Potential solutions
It can be no coincidence that the second key development of the past 12 months, the change implemented by HM Revenue and Customs to its process for registering pension schemes, occurred on the same day as the High Court decision was released. Rather than registering automatically, this means a more detailed risk assessment will be carried out first. It is too early to say how effective this change might have been but it should introduce an additional hurdle for the "liberators".
Aside from that, there is an increased amount of vigilance by transferring trustees compared with a year ago. Many have checklists in place to minimise the risks of transfers to liberation schemes. However, there are apparently as many as 41 complaints pending before the Pensions Ombudsman concerning transfers, and the majority of those seem to arise out of transfers that have been blocked. Many trustees are uneasy about standing in the way of transfers apparently in breach of the statutory duty to proceed.
Changes to the law
This inevitably leads to demands for changes to the current legislation. This is unlikely to happen in a hurry but some of the ideas mooted such as requirement of a payment of a fee for registration of an occupational pension scheme or the appointment of an independent trustee for every such scheme might well be effective ways of reducing pension liberation as a problem. The more cumbersome and less financially attractive it becomes for the "liberators", the greater the prospect that interest will wane and they move on.
Only time will tell whether the developments of the last 12 months and the good progress made in heightening awareness of pension liberation will be sufficient to cut pension liberation off at source or whether legislative change will be required.
Time may well be ripe for further review again next Valentines Day.
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