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First ombudsman decisions in pension liberation cases show need for a change in the law, says expert

Out-Law News | 12 Jan 2015 | 10:14 am | 3 min. read

The Pensions Ombudsman has dismissed complaints by three pension scheme members who were prevented from transferring their savings into suspected liberation schemes, but has warned that "mere suspicion" is not enough reason for a provider to block a transfer request.

The ombudsman, who is responsible for investigating complaints against pension providers, has now resolved four of more than 80 outstanding cases relating to suspected pension liberation schemes. Pension liberation arrangements market themselves as a means of giving pension scheme members access to their savings before they reach retirement age, but can put members' savings at risk. In addition, 'unauthorised payments' from pension schemes can result in heavy tax penalties.

Two of the complaints, against Zurich and AVIVA, were dismissed entirely by the ombudsman; while another, against the Standard Life Self-Invested Personal Pension (SIPP), was partly dismissed. However Ben Fairhead, an expert in pension liberation cases at Pinsent Masons, the law firm behind Out-Law.com, said that the ombudsman's determinations were not necessarily good news for pension providers.

"The ombudsman has focused on the law governing statutory transfers, which unfortunately does not protect members from pension scams," he said. "And the ombudsman's focus on the law does not tie in particularly well with the Pensions Regulator's pragmatic approach, which is aimed at trying to ensure that as few individuals as possible end up being scammed."

"What these determinations show is that it is time for a change in the law. Providers and trustees should be allowed to refuse to pay over any transfer to a scheme that they reasonably suspect may be involved in a scam. In the meantime, providers and trustees will have to review their processes to ensure they fall in with the ombudsman's approach," he said.

Fairhead said, however, that it was "still early days", with "dozens more" determinations due from the ombudsman.

Rules governing pension schemes prevent an individual from claiming pension benefits until they reach the age of 55, unless doing so on ill-health grounds. Tax charges on any unauthorised payment can be as much as 55% of the value of that payment. A pension liberation arrangement is designed to get around these restrictions by transferring money representing a saver's pension rights out of their existing scheme into a new scheme, which is often of an exotic, unregulated structure and based offshore, and then making the money available wholly or partly as a cash loan back to the saver.

In each of the three cases, the ombudsman had been asked to determine whether the pension scheme members had a statutory right to transfer funds out of the complained-of schemes to different schemes, each of which claimed to be an occupational pension scheme registered with HM Revenue and Customs (HMRC). The 1993 Pension Schemes Act gives pension scheme members the right to transfer savings to another registered pension scheme, and requires the original pension provider to make any transfer within six months of the request being made.

In the cases against Zurich and AVIVA, the ombudsman found that the scheme members did not have a statutory right to a transfer as the intended receiving schemes were not "occupational pension schemes" as defined by the 1993 Act. The intended receiving scheme in the Standard Life case did meet the statutory definition but the scheme member, Gregory Stobie, was not an "earner" in relation to it, the ombudsman said. However, the ombudsman also found that Standard Life had not correctly exercised its discretion under the scheme rules to make the payment even where there was no statutory right.

The ombudsman said that although there was no statutory right to a transfer in any of the cases, none of the providers had carried out enough analysis to establish that this was the case. He admitted that the strict interpretation of the law meant that schemes and pension providers "find themselves in a highly unenviable position", but added that a transfer could only be withheld beyond the six-month period for payment if there was no right to make that transfer.

In a statement, the ombudsman said that the latest determinations would not help schemes that "may offer dubious freedoms"; and would not "serve as authority for genuine pension schemes to bar transfers on the grounds of mere suspicion or undisclosed information".

"They will provide some encouragement to schemes asked to pay a transfer value that have followed the regulatory guidance, obtained as much evidence as they can and made a reasoned decision about whether there is a right to transfer or not," he said.

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