Pension scams – Court rules against “earner” interpretation as a means to block suspect transfers

In what will be regarded as a worrying development for pension providers who want to refuse to pay transfers where there are concerns about pension scams, the High Court has overturned the decision of the Pensions Ombudsman in the case of Hughes v Royal London (see Pensions Bulletin 2015/29 for our article on the original case).

As in previous cases the Ombudsman decided that Ms Hughes was not an ”earner” for the purposes of pensions legislation.  He had done so by inserting missing words into the legislation so that Ms Hughes' status as an earner had to be in relation to a “scheme employer”.  He ruled that she could not be regarded as an earner because she had no remuneration from the scheme employer, although she did from another source.  This led to the Ombudsman deciding that Ms Hughes did not have a statutory right to a transfer.

In contrast the judge held that inserting the missing words in the legislation could not be supported and that Ms Hughes’ earnings from the source unrelated to the receiving scheme sufficed to make her an “earner”.  This means that Ms Hughes has a statutory right to a transfer, which in turn prevents Royal London from using this argument to block the transfer, having expressed doubts about the bona fides of the receiving scheme.

Comment

The problem of pension fraud has just got worse.  Where due diligence revealed fraud concerns, the line that the member was not an “‘earner’” gave technical grounds on which to turn down the transfer request.  This route is now blocked, creating scope for more mischief from the scammers as the Ombudsman implicitly acknowledged in a statement released on Monday.

Although we have yet to see a similar case involving an individual seeking to transfer their benefits from an occupational pension scheme, it does seem that trustees now have no grounds under pensions legislation to turn down a transfer to a fraudulent scheme once earnings (from anywhere) can be proved.

Essentially, where we now are is that although dutiful trustees should continue to jump through all the due diligence hoops required by the Pensions Regulator and the Code of Good Practice (see Pensions Bulletin 2015/13), if they conclude that a suspect scheme is involved then, unless they want to get dragged through legal/Ombudsman proceedings, they have to pay out.  This is simply unacceptable and cannot continue.  Surely the Government must legislate to restrict the statutory right to a cash equivalent where there are good grounds to suspect fraud.

HMRC continues to roll-out the 2016 tax protections process

HMRC has published pro forma letter text for members to use when applying under the “interim process” (see Pensions Bulletin 2015/54) for either Fixed Protection 2016 or Individual Protection 2016 in connection with the reduction in the Lifetime Allowance from £1.25m to £1m on 6 April 2016.  HMRC has provided this wording so that members give the correct information that it requires to process the application.

Importantly, this process is only for individuals who intend to take benefits between 6 April 2016 and July 2016 and need the protection before then.  HMRC emphasises that individuals not intending to take benefits until after then should wait for the online digital service to be available.  The interim process is not a replacement for the online service and “everyone who protects their pension savings temporarily must make a full online application from July 2016 ... to ensure their pension savings continue to be protected from the lifetime allowance tax charge“.  Applications for the interim process should not be sent in before 6 April 2016.

Newsletter 76 also contains another reminder that there are still outstanding returns due from scheme administrators of pension schemes operating relief at source, as well as a promise that new forms will be available from 6 April to permit beneficiaries of some death benefits to reclaim overpaid tax deducted in year.

Comment

We are still exploring with HMRC how processing a retirement before the end of July with the “interim registration process” is intended to work.  In particular, whether – if a member does not then go on to make the full on-line application – there are risks for a scheme in relation to how it calculated the lifetime allowance charge and maximum permitted cash sum.  We hope that HMRC will clarify matters in time for the first post-April retirement!

DWP intervenes to assist those caught by changes to GMP revaluation provisions

The Department for Work and Pensions has announced its intention to help schemes amend their rules so that they can take advantage of the new manner in which the fixed rate GMP revaluation option applies from 6 April 2016 (and in so doing avoid an unwelcome GMP revaluation underpin).

Currently GMPs must revalue in line with the increase in national average earnings whilst the member remains contracted-out.  Many schemes choose to apply fixed rate revaluation to GMPs when the member ceases to contract-out (as opposed to continuing to revalue the GMP in line with the increase in national average earnings).  But with contracting-out ending on 5 April 2016, the DWP amended the legislation to enable fixed rate revaluation to apply only from the date the member’s pensionable service ends for those schemes that cease to contract-out on 5 April 2016.

What hasn’t been widely appreciated until now is that for those schemes that apply fixed rate revaluation (currently 4.75% pa), scheme rules are likely to reflect the linkage to when contracted-out service ends and so will need to be amended before 6 April 2016 so that the linkage is to when pensionable service ends.  Failure to make any rule change could result in schemes finding that they have a continuing legal obligation to provide revaluation in line with national average earnings, but the scheme rules require them to provide fixed rate revaluation from 6 April 2016 and thus a GMP revaluation underpin is introduced.

Furthermore, some schemes have restricted powers of amendment that might not enable such a change to be made.

The DWP intends to fix this second issue “in the next few months” by providing for a statutory modification power.  It is intended to have retrospective effect from 6 April 2016.

Comment

There is a clear immediate action for schemes that use fixed rate revaluation – check scheme rules and (where necessary) get them amended ahead of 6 April 2016 in order to avoid any revaluation underpin and ensure the correct revaluation treatment from 6 April 2016.  Failure to do this might result in an underpin being introduced which is then very difficult to remove.

Where a rule change is not possible there would appear to be no choice but to hope that the promised modification power will do the job.  The worry is that it may not be able to remove the effect of any underpin from 6 April 2016 to when the change is actually made.

European pensions regulator not giving up on solvency for pensions

We reported in Pensions Bulletin 2016/04 on how the block in the IORP II Directive on the development of solvency requirements for pensions (put in by the European Parliament in July 2015) continues to be present.  Undeterred though, EIOPA, the European pensions regulator, in its recently published 2016 work programme, has budgeted for its “own initiative” advice to the European Parliament, Council and Commission on “advice on solvency for IORPs and the use of the holistic balance sheet”.

There are some other elements of the work programme that are worth noting.  A long standing EIOPA work stream on insurance guarantee schemes has the potential to impact the UK financial services compensation scheme.  It is also notable that EIOPA proposes to deploy a sizeable chunk of its budget on developing itself “to act as a modern, competent and professional organisation, with effective governance arrangements, efficient processes and a positive reputation”.

Comment

EIOPA is incorrigible.  The original Barnier Commission idea to impose insurance style reserving on pension schemes was defeated at the political level.  The current position of the European Parliament is to rule solvency for pensions out of bounds and there is no indication that the Commission currently has any appetite to fight this battle again.  And yet EIOPA persists, partly financed by money raised by a levy on British pension schemes, who would be worst affected.

FCA to examine how financial services firms should respond to the ageing population challenge

A discussion paper has been published by the Financial Conduct Authority whose purpose is to start a debate with the aim of encouraging financial services firms to do more to respond to the challenge of an ageing population.  The FCA would like to see the financial services industry take the lead in undertaking appropriate innovation whilst providing proper levels of protection for consumers.

Unusually the paper takes the form of a collection of perspectives from various organisations arranged under a number of sub-headings.  There are no proposals from the FCA at this stage.  Instead, the FCA will undertake further research based on ideas set out in the discussion paper, and work with stakeholders to develop a regulatory strategy that promotes better outcomes for older consumers.  This strategy will be launched in 2017; those wishing to respond to the discussion paper have until 15 April 2016.

Further confirmation that the triple lock will apply to the new State Pension

Baroness Altmann has now confirmed that the new State Pension will increase in line with the greater of national average earnings, inflation and 2.5%, during the course of this Parliament.  This came during a House of Lords debate on Monday on the State Pension (Amendment) Regulations 2016 and the Social Security Benefits Up-rating Order 2016.  This follows a similar statement made by Shailesh Vara in the House of Commons earlier this month (see Pensions Bulletin 2016/04).

Baroness Altmann also acknowledged, in response to questioning by Lord McKenzie, that there will be losers from the new State Pension compared to had the current arrangements continued saying that “It is true that in the 2030s and mainly from the 2040s onwards, the general level of the state pension will not be as generous as it would have been if the current system had been sustained” (see our summary of the DWP report at the end of last year in Pensions Bulletin 2015/52).

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.