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Provider not entitled to refuse transfer to scheme suspected of pension liberation, High Court rules

A High Court decision preventing a pension provider from refusing to transfer a member's savings to a scheme suspected of being used for pension liberation could have "far-reaching consequences", an expert has said.

Mr Justice Morgan's ruling "lays bare the problems facing pension providers and trustees grappling with the rise of such scams", according to pensions litigation expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com, the lead legal adviser to Royal London, the pension provider in the case. Royal London had blocked scheme member Donna-Marie Hughes' request to transfer the cash equivalent of her accrued rights under its personal pension scheme (PPS), a refusal which was upheld by the Pensions Ombudsman in June 2015.

Before the High Court's decision, it was common for pension providers to request proof of an earnings relationship between the scheme member and the provider for the potential new scheme, Fairhead said. As most "dubious" schemes were unable to satisfy this criterion, it could be used by legitimate providers to justify their refusal to transfer pension rights if they suspected that the new scheme was being used for pension liberation, he said.

The High Court's judgment removed this "obstacle", leaving pension providers "without a legitimate legal basis for declining to make the transfers that ultimately enable pension scams to take place", he said.

"The consequences of this ruling are far reaching and could leave pension scheme members more exposed to the risk of scams," Fairhead said. "It will now be far easier for individuals to move their money from legitimate schemes, ultimately leading to a potential influx on monies into suspicious schemes as the hands of those being asked to make transfers are increasingly tied by the inflexibility of the law."

"In many ways this decision simplifies the law for pension providers who have been struggling with burdensome processes to decide whether to facilitate transfers where there are scam concerns. However, it also creates a great deal of uncertainty in the battle against pension scams," he said.

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. The scheme member in this case had applied in writing to Royal London requesting the transfer of the cash equivalent of her accrued rights under her Royal London PPS to an occupational pension scheme (OPS) by way of 'transfer credits'.

Last year, the Pensions Ombudsman held that Royal London had been entitled to deny this transfer on the grounds that Hughes was not an 'earner' under the rules of the OPS. He also held that Royal London did not act improperly by not exercising its discretion to transfer the cash equivalent of her accrued rights in any event.

The Ombudsman found that Hughes was employed by the principal employer for the purposes of the OPS, but that she did not receive remuneration from that employer. For this reason, she was not an 'earner'. However, the High Court found that the Ombudsman was only able to do so by "reading words into the definition of transfer credits", and that this was not something he had been entitled to do.

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.

Pension litigation expert Ben Fairhead said that although providers and trustees were "effectively tasked with trying to prevent pension funds disappearing into scams" by financial regulators, they would not be able to prevent transfers into schemes set up in accordance with the law.

"Barring a change to the law – which would be far from straightforward - or more decisive action being taken by government agencies to clamp down on suspicious schemes and the perpetrators, all the pensions industry can do for the moment is continue to warn the public," he said. "Inevitably, in the meantime, scope very much remains for unscrupulous individuals to target and exploit those desperate for cash or enticed by the prospect of implausibly high returns on investments."

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