Trustees of defined benefit schemes – are they on the hook for pension transfers? Yes says the Pension Ombudsman
The Pension Ombudsman has upheld a complaint against the trustees of a defined benefit scheme for failing to warn of the risks of a transfer to a pension liberation scheme. The Pension Ombudsman found that had the trustees provided documentation recommended under guidance from the Pension Regulator and identified and warned the member of certain hallmarks of a pension liberation scheme, the member would not have transferred his pension. The Pension Ombudsman has directed the trustees to reinstate the complainant's pension in the defined benefit scheme and pay £1,000 in distress and inconvenience.
Mr N was employed by the Northumbria Police Authority (the Authority). He had been employed by the Authority for 14 years and was a member of the Police Pension Scheme (the Scheme). He became a deferred member on 12 December 2012 when he made an application to stop making contributions to the Scheme.
At age 39 Mr N sought advice on the possibility of transferring to another pension provider where he could access his pension at 55. The Pension Ombudsman's decision noted that Mr N was concerned at this time that his pension would not be accessible under the Scheme's rules until he reached 60 and that the Scheme's rules may increase normal retirement age from 60 to 65. He contacted a company called Pension Transfer UK. Mr N received a follow up call 2 weeks later from Viva Costa International, an unregulated introducer of work to IFAs, and he was then referred to Gerard Associates Limited, a firm of financial advisers. Mr N was recommended a transfer to the London Quantum Retirement Benefits Scheme (London Quantum). London Quantum appears to have been a defined contribution scheme established in 2012.
Following what is said in the Pension Ombudsman decision to have been advice from Gerard Associates Limited, Mr N transferred his funds from the Scheme to London Quantum. The transfer was made in August 2014 with a value of c. £115,000.
In 2015, Mr N reviewed the documents that he had been given in 2012 and was concerned to note that he had signed up to a high risk investment as a sophisticated investor. He was unable to obtain satisfactory responses from the administrator of London Quantum or Gerard Associates Limited. The Pensions Regulator appointed an independent trustee to London Quantum in June 2015 and that independent trustee is currently trying to reconcile the assets of London Quantum. It appears that London Quantum was part of a pension liberation scheme (whereby members accessed their pensions before reaching 55).
Mr N brought a complaint before FOS against Gerard Associates. This was rejected as being outside of FOS' jurisdiction on the basis that no regulated activity had been undertaken by Gerard Associates; it appears that Gerard Associates' position was that it did not provide any advice and Mr N appears to have been advised by a separate unregulated person or firm.
Mr N then brought a complaint against the trustees of the Scheme. The Pension Ombudsman initially upheld the complaint. It then held an oral hearing before providing its final decision. The final decision also upheld the complaint.
The Pension Ombudsman's decision
The Pensions Ombudsman referred to the Pension Regulator's pension liberation fraud guidance of February 2013 issued before the transfer in late 2014 (the Scorpion Warning). It then referred to previous determinations where it has been said that February 2013 marked a point of considerable change in the level of due diligence expected of trustees, managers and administrators when considering transfer requests from defined benefit schemes. The Pension Ombudsman noted that it had seen increased levels of enquiry and due diligence from trustees since 2013 and in fact, in many cases complaints centred on a delay in a transfer taking place given the enquiries undertaken by scheme trustees.
The Pension Ombudsman commented that the "… overriding consideration for a scheme trustee or administrator must be to evaluate the transfer application carefully in order that a valid statutory transfer right is complied with and an invalid transfer application is legitimately withhheld…". The Pension Ombudsman then went on to comment on what the trustees of the Scheme failed to do in Mr N's case:
Failed to send the Scorpion Warning recommended by the Pensions Regulator since February 2013. Although the warning was available on the intranet for employees and the guidance did not prescribe that the warning had to be provided directly to the member, the Pension Ombudsman said that it would be usual practice to send the warning and that was definitely the case by August 2014 when Mr N's transfer took place.
Failed to identify a number of features which other pension schemes identified as red flags for pension liberation and where other schemes had in fact refused transfer requests. These red flags included that (1) London Quantum was sponsored by a dormant company, (2) it was clear that Mr N was not employed by the sponsor of the scheme (being the dormant company) given that he remained employed with the police force, (3) the location of London Quantum should itself have raised alarm bells as Mr N was based in the North East, and (4) there were only limited circumstances in which a serving police office would be allowed to have a second employment.
The Pension Ombudsman would have expected the member to have been asked why he was transferring to a scheme with an employer who did not employ the member and how he became aware of the receiving scheme. Had such enquiries been made, the Pension Ombudsman said that in all likelihood the involvement of an unregulated introducer would have been identified together with the type of investments made through the receiving scheme. The names of those involved and their link to pension liberation may also have been identified. Further, Mr N signed forms to indicate that he was a sophisticated investor seeking a high-risk investment when he says that he was not such an investor. It was found that had the trustees conducted adequate enquiries these issues are likely to have been identified and the concerns dealt with.
Failed to obtain a copy of the trust deed and rules of London Quantum to ensure that it met the statutory requirements for a transfer.
The trustees of the Scheme argued that Mr N would have made the decision to transfer even had he been provided with the leaflet and advised of the various risks. The Pension Ombudsman rejected this argument finding that "… had the [trustees of the Scheme] acted more diligently, as I consider it should, Mr N would, on the balance of probabilities not gone ahead with his particular transfer. There was simply too much for him to lose, with little in the way of potential discernible gain…".
Having found against the trustees, the Pension Ombudsman then considered section 99(1) of the Pension Schemes Act 1993 which provides a statutory discharge where the member exercises a statutory right to transfer out of a scheme and the trustees have "done what is needed to carry out what the member requires". The Pension Ombudsman said that the statutory discharge did not apply in this case as "what needed to be done" included ensuring that appropriate due diligence was carried out and any warnings and concerns brought to the attention of the member.
The Pension Ombudsman directed that Mr N's accrued benefits in the Scheme should be reinstated and he was awarded £1,000 for distress and inconvenience.
The implications for trustees of defined benefit schemes
The Pension Ombudsman's decision has received wide comment in the pension press. The finding against the trustees, however, should probably be seen in light of the factual circumstances of the case itself. First, this was a pre-pension freedoms transfer, at that time there was no requirement for the member to have obtained regulated advice on their pension transfer from a firm permitted to provide pension transfer advice; that would not be the case now and instead if a transfer is value is over £30,000 the trustees must check that appropriate independent advice has been obtained – the Pension Regulator says that this means checking the FCA's register to ensure that the adviser is regulated to provide the advice and does not require a trustee to check the advice itself.
Second, the transfer was to a pension liberation scheme, an issue which the Pension Regulator has highlighted to scheme trustees and which the Pension Regulator requires trustees to highlight to members. Also, as a pension liberation scheme the pension had not been placed into a product, such as a SIPP, and there was unlikely to be any benefit in bringing a claim against the trustee of the pension liberation scheme that had already been replaced by the Pension Regulator.
Third, the trustees of the Scheme had failed to provide the Scorpion Warning which most trustees would provide as a matter of course with any request to transfer.
Taking into account these factors, it is likely that the findings will be limited to pension liberation schemes and so, provided that the trustees conduct appropriate checks into the receiving scheme, provide the warnings set out by the Pension Regulator and check that for transfers over £30,000 that appropriate independent advice has been obtained, then the trustees should have a good defence to any complaint or claim brought by a member who later regrets their decision to transfer and those defences would include relying on the statutory discharge having carried out the necessary due diligence.
However, some of the commentary in the Pension Ombudsman decision arguably goes a little wider than just a pension liberation scheme. For example, the suggestion in the decision that trustees should ask questions around the transfer and potentially identify the involvement of unauthorised introducers has potentially wider implications.
If it is the case that trustees of defined benefit schemes should identify and highlight the involvement of unauthorised introducers as a specific risk when a transfer request is made then this probably requires more due diligence than most trustees usually undertake. This also raises the possibility of complaints and claims against trustees on the basis that they failed to highlight the risk of the involvement of an unauthorised introducer and the member arguing that they would not have transferred had that risk been highlighted. Whether or not such complaints and claims are upheld remains to be seen.