07 August 2018 - Post by:Helen Powell
A new pension liberation case has hit the headlines, after the Pensions Ombudsman (TPO) found that the authority managing the Police Pension Scheme could not rely on a statutory discharge following a transfer, because it had failed to perform adequate scam checks on the proposed receiving scheme and failed to give the member the Regulator’s warning material. TPO has ordered that the member, Mr N, should be reinstated in the scheme. It may be cold comfort to the scheme that it can look to recoup any funds that are recovered from the receiving scheme, since the member was already concerned that these may have been lost or misappropriated.
The problem seems to have arisen due to the particular circumstances of the transfer – Mr N was not looking to access his pension early, but to ensure that he would be able to access it at age 55, in the context of increases to normal pension age in public sector schemes. The police authority did not detect any of the obvious signs of pension liberation and argued that there was no statutory requirement to send the Regulator’s ‘Scorpion’ material (although it had provided a link to it on the police intranet). Mr N had originally been looking to transfer to a personal pension, and it was only post-transfer that he realised he had signed up to a high risk investment as a sophisticated investor, and had transferred to an occupational scheme. Mr N gave evidence that he had put his trust in his IFA to find the right pension for him.
However, TPO found that the police authority’s procedures were not good enough – industry standards changed following publication of guidance about pension liberation fraud in February 2013, and the scheme’s practices had failed to keep pace. Publishing the Scorpion material on their intranet was not enough – the material was designed to be sent to individual members and the failure to do so was maladministration. The authority had also ignored other features, such as the scheme sponsor being a dormant company registered at an address ‘far removed from the scheme member’. Even the name, London Quantum, should have rung alarm bells in relation to a deferred member who was a serving police officer living in Northumberland.
The authority had missed signs that should have triggered closer enquiries, which would then have revealed further issues with the transfer process and the receiving scheme. TPO accepted that members are free to make potentially poor financial decisions, but said that this did not absolve the transferring scheme of responsibility, particularly given that most other providers were taking a more cautious approach by the time this transfer was made. Put at its simplest, ‘there should have been some direct engagement from the Authority before it finalised Mr N’s life-changing request’.
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The decision has a financial impact for the police authority, which has been ordered to reinstate Mr N’s benefits in the scheme (it is unclear whether any funds will be recoverable from the receiving scheme), as well as paying £1,000 compensation to Mr N for significant distress and inconvenience. The key point to note is TPO’s ruling that the authority could not rely on the statutory discharge provided by section 99(1) of the Pension Schemes Act 1993 because the condition in that section, that the trustees have done ‘what is needed’ to carry out the member’s transfer request, had not been met. This is new – TPO is expressly saying that ‘what is needed’ includes pension scam due diligence in line with the current industry standards applying at the time of the request and transfer, with any warnings or concerns identified and brought to the attention of the member so that he or she can make a fully-informed decision. TPO also emphasised the importance of paying heed to its own determinations in other cases.
In the context of recent updates to the Code on Combating Pension Scams, schemes should review their processes. The updated Code reflects some new developments, including the practice of ‘factory-gating’ and the risk of ‘cloned’ schemes. It ‘strongly suggests’ that a direct fact-finding call from the trustee/administrator to the member early in the process can help to identify cases of greater concern. Schemes should check that their processes are sufficiently rigorous and consistently applied. For further advice or training, please get in touch with your usual Allen & Overy adviser.
Helen Powell is PSL Counsel at Allen & Overy LLP.