Trustees – damned either way?

In Hughes v Royal London Insurance [2016] EWHC 319 (Ch) the High Court in England found in favour of a member requesting a transfer, as a consequence changing the considerations for trustees dealing with pensions transfer requests.

Requests by members to transfer the value of benefits they have built up in a pension scheme to another arrangement have, in recent years, left trustees with the difficult task of balancing their obligations to meet legislative requirements and their duties to the member whilst carrying out proper due diligence in relation to the transferee scheme.

Trustees recognising their fiduciary responsibilities will be reluctant to transfer any monies out of a scheme where there may be reasonable concerns that the transferee scheme may not be a registered pension scheme, or may potentially be a vehicle for pensions liberation (where investors are tricked by scammers into transferring their pension pots to schemes which appear legitimate but are not).

“Transfer credits” defined

Ms Hughes had a personal pension plan with Royal London and requested to transfer the value of her plan to a small self-administered scheme. Royal London refused the request as they suspected she was about to become a victim of a pensions liberation scam.

Ms Hughes complained to the Pensions Ombudsman, arguing that Royal London should not have blocked the transfer as she had an overriding statutory right to a transfer. (Members of certain types of pension schemes have a statutory right to take a cash equivalent transfer value to another registered pension scheme. The legislation sets out how somebody with a statutory transfer value may use that value, including acquiring “transfer credits” in an occupational pension scheme. The statutory definition of “transfer credits” refers to “rights allowed to an earner”, and the case turned on the interpretation of this phrase.)

The Ombudsman held that as Ms Hughes had no relevant earnings with an employer under the new scheme (a common feature in relation to alleged pension scams), the proposed transfer did not satisfy the legal conditions to be a statutory transfer and therefore Royal London was entitled to refuse the request.

Ms Hughes appealed against this determination to the High Court, which held that in order to meet the statutory “transfer credits” requirement it was sufficient that she was an “earner” by reason of her earnings from any source, even although she was not receiving earnings in relation to pensionable service under the new scheme.

Impact of the decision

The ruling has been greeted with dismay and frustration in the pensions industry, as it seems that trustees are damned if they agree to a transfer which results in the member being a victim of a pensions liberation scam, and damned if they do not proceed with a transfer even if they have suspicions about the transferee scheme. This raises a question as to how far trustees can go in order to protect members requesting a transfer.

In response to the judgment the Pensions Ombudsman issued a statement advising:

“The Pensions Ombudsman Service has around 200 live cases which are affected by the ruling, so we welcome the clarity that it brings to those using our service and to the industry generally.

“In particular, it provides instruction to trustees and administrators that, assuming the other requirements for a statutory transfer right are made out, members do not need to be in receipt of earnings from an employer sponsoring the occupational pension scheme to which they wish to transfer their pension. Earnings from another source are sufficient.”

It is understood that the Ombudsman has called for the Department for Work & Pensions to legislate to clarify the position for trustees.

Trustees should now revisit any past decisions where they refused a transfer on “transfer credits” grounds alone. Trustees should also review their transfer process and make any appropriate changes in light of the decision. They need to be clear where transfer rights exist and where they do not. When presented with a transfer request, trustees should undertake appropriate due diligence, taking into account legislative requirements as well as relevant statutory guidance and good industry practice. They should also be providing information and raising awareness about pensions liberation scams.

It is hoped that the DWP will legislate to assist trustees. In the meantime, trustees should continue to process transfer requests with the utmost care and attention.