Pension Ombudsman offers guidance on statutory transfer rights and pre-2021 due diligence standards

The decision (17-page / 2.1MB PDF) also provides further clarity on due diligence standards expected of trustees before the changes introduced by the entry into force of The Occupational and Personal Pension Schemes (Conditions of Transfer) Regulations 2021 (Conditions of Transfer Regulations).

The member, Mrs T, transferred her pension benefits to a small self-administered scheme (SSAS) following an unsolicited approach by an unregulated adviser. Mrs T alleged that the transferring trustee failed to exercise its duty of care by not identifying warning signs of a potential scam, and sought to be restored to the position she would have been in had the transfer not occurred.

In June 2014, the trustee received a letter of authority from Mrs T, appointing the unregulated adviser and another FCA-regulated firm to act on her behalf. The trustee provided a cash equivalent transfer value (CETV) quotation and the regulators’ ‘Scorpion’ information leaflet on pension scams.

In September 2014, the SSAS was established. The SSAS was registered with HMRC, and the trustee sought confirmation from HMRC regarding its registration status. HMRC confirmed the SSAS’s registration and indicated no significant risk of pension liberation. The transfer of approximately £77,000 was then completed. Mrs T invested the transferred funds in overseas property investments, which later became worthless.

Her representatives argued that the trustee had failed to exercise its duty of care to protect Mrs T’s interests, follow guidance put in place by The Pensions Regulator (TPR), identify red flags relating to the proposed transfer - such as the unsolicited approach to Mrs T - or conduct sufficient due diligence. 

They also argued that the transfer was void as she did not meet the definition of an “earner”, which they said was necessary for Mrs T to have a statutory right to transfer.

The trustee’s position was that it had complied with its obligations, having verified the SSAS’s registration with HMRC and confirmed Mrs T’s statutory right to transfer.  It has also provided her with information on pension scams, suggested independent financial advice, and conducted due diligence in line with the guidance available at the time.

The trustee argued that Mrs T was aware of the risks but chose to proceed with the transfer.

The ombudsman focused on whether Mrs T had a statutory right to transfer her benefits and determined that she did.

When exercising a statutory right to transfer to an occupational pension scheme, the transfer payment must be used to acquire “transfer credits” in the receiving scheme. Mrs T’s representatives argued that the judgment in the 2016 Hughes v Royal London case meant that Mrs T must be an "earner" to acquire transfer credits and that her income as a foster carer would not qualify as earnings for this purpose. 

The PO concluded that, while the Hughes judgment proceeded on the basis that a member must be an earner to acquire transfer credits, this was not a binding aspect of the court’s judgment. In the PO’s view, the member did not need to be an earner to acquire transfer credits and had validly exercised her statutory transfer right.

The PO also concluded that the trustee had no legal duty to investigate her circumstances, issue warnings, or prevent the transfer based on potential scam risks. The guidance available at the time, including the 2013 and 2014 Scorpion documentation, did not impose a legal obligation to conduct extensive due diligence or override a member’s statutory transfer request.

The ombudsman found the trustee had taken reasonable steps to inform Mrs T of the risks, including providing the Scorpion leaflet and recommending independent advice. Mrs T had ample opportunity to review the information and seek further clarification but chose to rely on advice from unregulated advisers. The trustee was not liable for her decision to transfer her benefits or the subsequent loss of her pension funds.

This follows another recent determination (37-page / 2.34MB PDF), which also explained that trustees were under no legal duty to carry out due diligence in relation to scam risks before the Conditions of Transfer Regulations came into force. The PO did, however, note that he may take a different view in future cases if a trustee has voluntarily assumed a duty to perform due diligence and communicated this to a member, if a transfer is subject to the FCA Handbook or where a transfer is discretionary. These circumstances will be considered, where necessary, in separate determinations.