Out-Law Analysis 5 min. read

Pensions disputes: smaller schemes under the ombudsman’s gaze

Small self-administered schemes (SSAS) have been under the Pension Ombudsman’s (PO) spotlight recently, with two recent cases brought by scheme members.

The PO looked at the issues of expert determinations for schemes governed by trust deeds, as well as the use of SSASs to facilitate unregulated investments.

Status of experts’ determinations

In a recent case (24 page / 9.53MB PDF) concerning a SSAS, the PO has set out its views on the status of ‘binding’ expert determinations in the context of a pension scheme governed by a trust deed. The PO did not accept that it would be correct for trustees to proceed on the basis of an expert’s determination if they know that determination to be incorrect.

The scheme had two members who were both trustees. The provider acted as a professional trustee.

On the death of one of the members, Mr Y, the other member, Mr L, complained that the professional trustees had failed to correctly allocate funds. The PO found that there were no grounds on which to set aside an independent expert’s determination about how scheme funds should be allocated.

Mr Y’s wife claimed a death benefit on her husband’s death in 2018, having been named on his expression of wish form as the recipient of any death benefits.

A complaint by Mr L about the allocation of funds was resolved on the basis that Mr L and the provider should appoint an expert, under the scheme rules, to decide the amount of death benefit payable. The expert concluded that 54.8% of the fund should be allocated to Mr L and 45.2% to Mr Y.

Mr L disagreed with the expert – but after considering this latest complaint, the PO said there were no grounds to set aside the expert’s determination. Mr L and the provider, as trustees of the scheme, were bound by the expert’s findings.

The provider had argued that, so long as he answered the right question, the expert’s decision was binding even if it was wrong.

However, the PO did not accept that this principle applied to pension scheme trustees. The PO concluded that, if trustees have any concerns about an expert’s determination, it would expect them to seek clarification before proceeding, regardless of whether or not the trust deed stated that the expert’s determination is binding.

Self-administered schemes and unregulated investments

SSASs were also the topic of another recent decision (14 page / 3.92MB PDF), in which the PO warned providers about their use as a means of facilitating unregulated investments and advised vigilance where there are arrangements involving unregulated parties.

The circumstances of this case pre-date the introduction of new regulations in November 2021, which restrict the right for a pension transfer when red or amber ‘flags’ identifying potential pension scam risks – including where overseas investments are included in receiving schemes – are identified. The transfer regulations seek to put a stop to SSASs being used as vehicles for unsophisticated individuals making esoteric investments.

Mr L complained about the failure of his SSAS administration provider to ensure he received proper independent advice before investing in an unregulated investment which he now believes may be a scam.

After meeting with an unregulated pension introducer, Mr L was persuaded to transfer his pension savings into a SSAS in order to invest in a hotel and spa development in Cape Verde. The provider set up and administered the scheme and dealt with the pension transfer.

The scheme invested nearly £68,500 in the hotel development. Mr L and the provider later sought the return of the funds he had invested, but none of the capital has been refunded.

The PO said it would only consider whether the provider had acted correctly and in accordance with its obligations. Its role under the scheme rules was limited to using all reasonable endeavours to ensure that Mr L had obtained “proper advice” and that the advice met the requirements of the scheme’s trust deed. It had no fiduciary duty or broader duty of care requiring it to ensure the advice was suitable.

There was no requirement for regulated advice, as the investment vehicle was a company limited by guarantee, and the advice Mr L had received and signed included clear warnings about the risks involved.

The PO was also satisfied that the evidence showed that the provider was reasonably persistent in chasing for the return of the invested funds.

Although the complaint was not upheld, the PO warned the provider to be wary of similar unregulated parties in future.

The PO noted that the adviser had been linked to a number of other complaints of a similar nature against other SSAS providers, using these schemes to circumvent possibly more stringent requirements placed on other types of pension scheme. The lack of regulation of firms such as this means that they are not necessarily acting in the best interests of their clients, who may not fully appreciate the risk they are taking.

Provider’s efforts to compensate for valuation error sufficient

In a decision (11 page / 2.65MB PDF) concerning an incorrect retirement quotation, the PO said the complainant should have contested the figures in the quotation before accepting them and claiming a trivial commutation lump sum.

Miss N complained that her pension provider had understated the value of her plan when providing a retirement quotation. She opted to take a trivial commutation lump sum of over £13,000. The provider later identified a system fault which meant that the lump sum payment was less than half the actual fund value.

The provider informed Miss N that it would pay her more than £18,000 to correct the error and cover interest and any resulting tax penalties. It later also offered to pay her £1,000 for distress and inconvenience.

Miss N said she had decided to take the lump sum because of the fund’s apparent poor performance, but if the provider had not made an error she would have remained in the plan to benefit from her employer’s contributions.

The PO was satisfied that the provider’s offer to put backdated contributions from Miss N and her employer into a stakeholder plan was a reasonable offer. However, both Miss N and her employer declined to pay backdated contributions.

The PO said the provider did not have to do anything further as it would be disproportionate to make good both the employer’s and employee’s missing contributions, as well as any missed investment gains. The PO added that paying the correct fund value plus interest was an appropriate remedy.

An interesting aspect of the PO’s decision is his statement that Miss N should have contested the figures in the incorrect retirement quotation before accepting them. The PO said this “would have required the provider to carry out a detailed investigation which would undoubtedly have identified the error”.

Miss N said she could not have known that an error had occurred because the provider stated that her fund value could go up or down. However, the PO considered a shortfall of almost 50% ought to have prompted Miss N to raise the issue: “normal unit price fluctuations were unlikely to almost halve Miss N’s fund value”.

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