Pension transfers: protecting people from themselves

Two recent Ombudsman determinations highlight the extent to which protections in place for members electing to transfer between pension arrangements will be construed widely.

Transfer diligence

In Mr N v Northumbria Police Authority (PO-12763), N complained that the Authority had transferred his pension fund to a new scheme without having conducted adequate checks on that scheme, and failed to provide him with a sufficient warning required by the Pensions Regulator.

The Pensions Ombudsman upheld N’s complaint because he considered the Authority to have failed:

• to conduct adequate checks and enquiries in relation to N’s new scheme;
• to send N the Regulator’s transfer fraud warning leaflet; and
• to engage directly with N regarding the concerns it should have had with his transfer request, had it properly assessed it.

The Ombudsman was satisfied, on balance of probabilities, that but for the Authority’s maladministration N would not have proceeded with his transfer and suffered a loss. To put matters right the Authority was required to reinstate N’s accrued benefits in the scheme, or provide equivalent benefits, adjusting appropriately for revaluation. To avoid double counting, the Authority was entitled to recover from N the amount of his pension fund that the trustees of the new scheme were able to retrieve for him, if any.

In his conclusions the Ombudsman highlighted the importance of the Pension Regulator’s Pension Liberation Fraud Guidance of February 2013, which marked a point of considerable change in the level of diligence expected of trustees, managers and administrators when considering transfer requests. The Ombudsman was not satisfied that the Authority had undertaken sufficient diligence and enquiry.

Trustees, managers and administrators should review transfer-out procedures to ensure that not only are adequate diligence and enquiry made prior to any transfer, but that they will be able to evidence that at a later time.

Insistent clients

The complaint of Mr C against Portafina LLP (ref DRN9316495) to the Financial Ombudsman Service concerned advice given in relation to a transfer from an occupational pension scheme (“OPS”) to a self-invested personal pension scheme. The Ombudsman considered the advice unsuitable and decided that Portafina should put C as far as possible into the position he would have been in if he had not transferred.

That might not have been a terribly noteworthy finding had it not been for several features of this case, including:

1. Portafina sent C a letter setting out the benefits that would be payable from the OPS. It also made clear to C that:

• as the critical yield was 10.1% it would be against its recommendation to transfer;
• if he still wanted to transfer it could help but it would have to treat C as an insistent customer;
• C would need to complete an insistent customer form.

2. C returned Portafina’s form saying he still wanted to transfer, and signed their insistent customer form which said:

“I fully understand that... it is unlikely that my new policy is going to achieve a growth rate of 10.1% per year to match the guaranteed benefits held within the OPS.

“I am aware that transferring my guaranteed OPS is against the advice of the firm and I understand that I will be worse off in retirement. I still wish to proceed with taking my benefits now.”

3. A pension release report sent by Portafina to C stated:

“You would like to cash-in the maximum amount available from your pension as you would like to make home improvements and create an emergency fund.

“Due to the guaranteed benefits that you will be relinquishing with [the OPS], it is against my recommendation to transfer your benefits. You have decided that you still wish to proceed with the Pension Release. On this basis, although we can help you release money from your pension, we are treating you as an insistent client.”

The Ombudsman decided that in order to arrange the transaction on an insistent customer basis, Portafina first had to provide C with a suitability report that explained his options and the associated advantages and disadvantages of these. This should have put C in a position to make an informed decision to go against the adviser’s recommendation. He did not consider that Portafina fully set out the options available to C through his OPS in an understandable manner.

Whilst the Ombudsman accepted that C was alerted to the prospect that the OPS would be more beneficial and that by transferring he would be worse off in retirement, he did not think the degree to which C’s benefits could be affected was set out in understandable terms.

Advisers undertaking business on an insistent client basis should review their procedures in light of this approach.

Useful reminder

Whilst there are aspects of each case which suggest them to have been very much determined on their own facts, they serve as a useful warning of the extent to which others may ultimately be held responsible for protecting individuals from themselves.