Where flexibility risks liability

Caroline Overton

Flexibility is a good thing – especially for sports professionals, gymnasts, and those of us balancing work and domestic commitments. In a pension context, the increased flexibility introduced by the 2015 freedom and choice reforms has generally been seen as a welcome response to the evolving nature and shape of retirement. The flexibilities have proved popular, with over 3.7 million transactions in the first three years of the policy.

However, as anyone suffering from hypermobility knows, the premium of flexibility carries the downside risk of serious injury due to stretching beyond what was ever intended. There comes a point where the elastic band snaps. Greater freedom and choice for retirees is inevitably accompanied by the risk of poor choices which may jeopardise an individual’s retirement savings. Pension flexibilities can be a particularly fertile ground for pension scammers.

This, of course, leaves trustees between a rock and a hard place in managing member transfer requests. The tide has been turning in favour of significant due diligence in protecting against pension scams, particularly with the helpful matrices set out in the Pension Scams Industry Group’s updated voluntary code of practice. That said, trustees should also be aware of a recent decision by the Ombudsman indicating that excessive due diligence is not a good thing, and could result in provider liability for any delay causing investment loss to the transferring member.

In this case (Mr S – PO 19383), the member had requested a transfer of his SIPP to his occupational pension arrangement – the Universities Superannuation Scheme. Despite the USS’s significant size and established nature, and the fact that Mr S had been a member of the USS for many years, the administrator continued to request a full suite of scheme deeds and certified bank statements – leading to a four-month delay in making the requested transfer. Here, the Deputy Pensions Ombudsman decided that the administrator had undertaken excessive and disproportionate due diligence, resulting in the member losing out on investment growth and suffering distress and inconvenience.

As a cautionary tale, this case gives a few helpful take-away points for trustees assessing transfer requests. Firstly, the Deputy Ombudsman commented that fund reconciliations and due diligence and checks should have been carried out concurrently – it was not reasonable to start due diligence several months after the request had been made, once the initial fund reconciliation had been completed. Secondly, while adhering to the checks set out in voluntary code is advisable, this does not override the requirement for a proportionate approach to due diligence. Finally, the Deputy Ombudsman comments that she cannot see why more than a few weeks was necessary to complete due diligence on a large and established occupational pension scheme. It is important to keep in mind how long checks are taking, and whether they are proportionate to the transfer being requested, particularly where the risk of a pension scam has already been identified as near zero.

It is reassuring that the Deputy Ombudsman went to lengths to stress the importance of due diligence aimed at avoiding pension scams; for example, even with a well-known, well-established scheme, it would be important to ensure that the scheme is what it claims to be, and not a cloned scheme with a near-identical name. At the same time, however, this is a timely reminder that a one-size-fits-all approach to assessing transfer requests is not advisable.

Caroline Overton is a Senior Associate at Allen & Overy LLP

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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