Out-Law / Your Daily Need-To-Know

Pensions disputes: provider transfer due diligence clarified

Out-Law Analysis | 28 Jul 2022 | 8:50 am | 4 min. read

Pension providers are unlikely to be penalised for permitting transfers to take place to a scheme which later falls under regulatory scrutiny where there were no concerns about the scheme at the time, the UK Pensions Ombudsman (PO) has suggested.

In two recent determinations, the PO looked at past transfers to a scheme which was later the subject of regulatory investigation. Neither complaint was upheld, as the PO accepted that transfers could not be judged with the benefit of hindsight where there was nothing at the time to alert providers to concerns about the receiving scheme.

In another recent determination, the PO helpfully outlined some of the investment responsibilities of a member of an execution-only self-invested personal pension (SIPP).

Execution-only SIPP member’s investment responsibilities

The complaint by the SIPP member, Mr N, was not upheld by the PO.

Mr N’s SIPP was set up on an execution-only basis, so the provider and administrator were not responsible for investment choices and did not offer advisory services.

Having withdrawn the bulk of the SIPP’s assets over time, Mr N decided to close it because he was concerned about the effect of fees on the remaining value. However, some lines of stock within the SIPP were illiquid and untradable, as they had been delisted from the Alternative Investment Market (AIM). The SIPP could not be closed while it still held assets, but the administrator made a transfer payment leaving £500 in the account to cover ongoing administration charges. Mr N requested that the illiquid investments be donated to charity, but the administrator said it was unable to do so as HMRC only permitted this where it had declared the assets to have “negligible value” or the administrator could “make a confident judgement” what HMRC would make such a declaration in the future.

Kemp Michael

Michael Kemp

Senior Pensions Technician

Providers’ due diligence processes will be assessed based on the information and guidance available to them at the time of a transfer – even if it later emerges that that transfer may not have been in the member’s best financial interests

Mr N complained that he was unable to close the SIPP. He felt it was unfair that the administrator required him to leave £500 in the account to cover ongoing fees. He also complained about poor service from the SIPP provider and administrator, and delays in responding to his complaint.

The PO, dismissing Mr N’s complaint, was satisfied that Mr N was aware of the services provided by the provider and the administrator, and the charges and fees incurred. As the product was execution-only, it was Mr N’s responsibility to monitor his investments so that he could take action in respect of any that were losing value before they became illiquid. He should also have been carrying out his own research on the continued financial strength and viability of the assets.

Under the terms and conditions of the SIPP, the administrator had the right to be paid for the services it provided, and to continue to charge fees for as long as the SIPP exists. It was in its rights to require Mr N to set aside provision for future fees, and the PO did not think £500 was disproportionate.

The PO considered that the closure of part of the SIPP to new fees, and a £100 payment by the provider, was an adequate award for the distress and inconvenience Mr N suffered.

The PO found that Mr N had chosen to invest in high risk, alternative investments with a propensity to become illiquid. While he may not have foreseen this particular outcome, there was adequate warning in the literature provided to him that he would be responsible for fees.

No ‘benefit of hindsight’ on transfer due diligence

Two further determinations, involving complaints made about transfers which took place in 2016, should give some comfort to providers that their due diligence processes will be assessed based on the information and guidance available to them at the time of a transfer – even if it later emerges that that transfer may not have been in the member’s best financial interests.

Mr S and Mr R both complained that their pension provider – a different provider in each case – had failed to carry out sufficient due diligence before transferring their benefits. The receiving scheme was registered with HMRC and the scheme administrator was regulated by the Financial Conduct Authority (FCA). However, in February 2018, the receiving scheme was wound up in court after running into financial difficulties.

Responding to the complaint by Mr S, the PO found that problems with the administration of the receiving scheme and the assets it held were not uncovered until 18 months after the transfer and the provider of the ceding scheme would not have been aware of these problems at the time. The PO found it was “more likely than not” that the provider had included the multi-agency ‘Scorpion’ anti-scams leaflet in the transfer pack and it was not unreasonable for the provider to have expected the provider of the receiving scheme, as an FCA-authorised firm, to have forwarded the leaflet to Mr S.

In Mr R’s case, the provider’s due diligence processes were considered in light of the leaflet as well as the Pension Scams Industry Group’s 2015 Code of Good Practice (‘PSIG Code’), which would have been in force at the time of Mr R’s transfers. The Code, which has been updated several times since its initial introduction, set out a two stage due diligence process, involving initial analysis of any factors that would indicate a scam risk plus further checks only if the initial analysis revealed some concerns.

The PO held that there was no apparent reason, given what was set out in the Scorpion leaflet, for Mr S’s provider not to make the transfer payment: there was nothing to suggest that Mr S had received an unsolicited approach, and there was no undue pressure on the provider to complete the transfer quickly. Mr S was 56 and could access his pension at any time. In addition, the receiving scheme was FCA-regulated and had been registered for over a year before the transfer took place.

In Mr R’s case, the PO decided that the due diligence checks carried out by his provider were reasonable and, in view of these checks, it was reasonable for the provider to make the transfers. Mr R’s advisers argued that the provider should have made Mr R aware that the ceding scheme’s FCA registration did not cover providing advice in relation to pension transfers, nor arranging those transfers. However, the PO did not consider that the provider had any reason to look more closely at the FCA register beyond a basic check to make sure that the ceding scheme was present.

The PO expects providers to have regard to current regulatory and industry guidance on pension scams. The PSIG Code has been updated several times since it was first published in 2015, most recently in April 2021. It now includes resources such as template letters and telephone scripts which providers may find useful.