Out-Law Analysis | 23 Feb 2021 | 1:09 pm | 4 min. read
Recent determinations by the Pensions Ombudsman (PO) have highlighted the importance of clear terms and conditions and managing members' expectations around transfers and retirement.
The determinations also demonstrate that scheme members will be expected to read documentation issued by their pension providers, and to ask questions where anything does not seem sufficiently clear.
In Mr E (PO-26512), the PO partially upheld a complaint by a member who claimed that delay by his self-invested personal pension (SIPP) provider in processing an in-specie transfer had caused him investment loss.
The circumstances of the case appear reasonably complex, with various factors contributing to the delay. The provider had to process the transfer, pay a solicitor's invoice relating to the member's SIPP – which required member authorisation following internal process changes at the provider – and wait on the outcome of a VAT reclaim, as well as deal with correspondence and queries from the member.
The provider was not completely responsible for the delay in processing the transfer, most of which appeared to have been caused by the VAT reclaim. Mr E had also delayed in providing the required authorisations to the provider. The PO awarded £500 for distress and inconvenience, and the member may be able to claim for investment loss over a period of less than a month if he is able to provide evidence to support this claim.
The PO is typically sympathetic to members where they have experienced delays and that is very much the case here, even though the provider was not entirely responsible. Systems and processes to manage member expectations can help to ward off the Ombudsman – and the potential for more substantial investment or opportunity loss claims.
In Ms T (CAS-38962-P9M1), the PO partially upheld a complaint by a member who had taken out a loan of £1,000 that she had been planning to pay back using an anticipated cash lump sum from her section 32 buy-out (deferred annuity) policy. However, because the value of the plan was insufficient to cover the cost of her guaranteed minimum pension (GMP), the provider was unable to offer Ms T tax free cash or a trivial commutation payment.
The PO said that the provider should have explained the reduced options open to the member earlier in the process, as it was aware that the value of the policy was insufficient to cover her GMP. In particular, Ms T's financial adviser was told that the amount of tax free cash available would depend on the level of residual fund following payment of the GMP, although the provider would have known at this point that the funds were insufficient to cover the GMP liability. The PO therefore made an award for "significant distress and inconvenience".
However, the PO noted that the provider is acting in accordance with the terms of the plan and is making up a shortfall from its own funds to ensure that Ms T's GMP is paid and she will receive the benefits to which she is entitled. The increased cost of the GMP could not have been predicted by the provider when the plan was first set up, in 1989. The PO confirmed in his determination that "in general, poor investment returns are not necessarily indicative of maladministration and certainly not in relation to section 32 buy-out plans".
The case highlights the importance of managing member expectations at an early stage - in this case, at the retirement stage although the principle applies equally to the transfer process. It is also worth noting that Ms T raised some new issues after a PO adjudicator issued their opinion in the case, but the PO declined to consider these in his determination as they had not previously been raised with the provider.
In Mr S (CAS-39168-W8B3), the PO dismissed a complaint by a member that the provider's exit penalties were unreasonable and unfair.
Mr S's pension fund was valued at £20,694.09, but £3,237.46 was deducted as an early exit penalty when he transferred his policy. The PO determined that Mr S would have been expected to read the provisions relating to the policy before making the decision to join, and it would have been open to him to make enquiries or seek independent financial advice before taking out the policy.
The provider stated on its website that it did not "generally" apply charges on transfers. However, the PO didn't think that this was misleading, as there was a caveat stating that this would depend on the type of pension plan and the terms and conditions of that plan. This should have alerted Mr S to the possibility that an exit penalty may apply, and the PO considered that he should have contacted the provider for confirmation on whether any exit penalties would apply in his particular case before proceeding with a transfer.
Before Mr S applied for a transfer, the provider quoted both a fund value and a transfer value that was lower. Mr S was therefore aware that a reduction was being applied, even if the provider did not explain how the exit penalty was calculated until after the transfer had been made.
The case emphasises how important it is for scheme members to read the documents they receive and to ask questions about anything that doesn't seem correct or consistent. In another recent determination (Mr and Mrs N, PO-27663), the PO noted that the member had failed to take the opportunity to ask questions when he was given an explanation by the provider of charges which could have been clearer. For providers, this also reinforces the need for clear terms and conditions and good member communications as a key part of risk management.
Co-written by Lorna Khemraz of Pinsent Masons
13 Aug 2019
27 Aug 2019