Rob Yuille, Manager, Retirement PolicyA recent High Court judgment on a technicality about pension transfers is attracting a lot of interest. Why? As well as the underlying concern that the scheme involved could be a scam, it raises some fundamental questions about the role of the State, providers, employers and consumers in pensions.
For some years providers and policy-makers have had concerns about pension liberation and pension scams, which followed a similar format of unsolicited marketing to customers, a ‘free pension review’ and an incentive to transfer into a scheme – such as early access to a pension or unrealistically high returns. But customers using these schemes risked losing their savings in high commissions, tax liabilities or fraudulent investments. As a result, many providers were blocking transfers to schemes they felt to be suspicious.
The High Court case involved a provider's decision to block a customer's request to transfer to an unfamiliar scheme, invested in off-plan hotel developments in Cape Verde. Several of the ‘warning signs’ highlighted by The Pensions Regulator and the Code of Good Practice on Combating Pension Scams were present: the cold call, the recently established occupational scheme with no apparent employment relationship with the individual, the unregulated introducer (who was based in the same part of the same town as the investment provider), the high-risk investment in a single asset and the optimistic guaranteed returns. The FCA had also warned about overseas property, and hotel developments in Cape Verde were specified in an alert by the National Fraud Intelligence Bureau.
But the customer's complaint about the blocked transfer, the Pension Ombudsman's decision to reject the complaint, and the High Court ruling did not consider the possible risks of the scheme. They could only focus on a point of law: whether someone could be considered an "earner" in relation to an occupational scheme if they had no earnings from the employer that sponsors the scheme.
This was important to providers because previously the Pension Ombudsman had agreed that they could legitimately refuse a transfer to an occupational scheme where there was no proof of an employment relationship. But the High Court allowed the customer's appeal, effectively requiring the provider to transfer the money, as there is nothing in the law to say that an occupational scheme member has to have any earnings from a related occupation. However, this strict interpretation of the law leaves providers in limbo and customers exposed.
Despite the additional clarity, this still matters to providers, who are expected to do extensive due diligence before a transfer. They will now have little choice but to let the money go. There is a risk of complaints or regulatory sanction that the provider should not have transferred the money. And above all, customers' trust in the pension system is at stake.
The Government has acted in the past on pension liberation and will need to do so again to protect the interests of consumers. The menu for policy intervention is broad with different degrees of intrusion, but we do not see doing nothing as a result of this case as an option. The announcement of legislation to tighten regulation of Master Trusts, partly sparked by fraud concerns, is a good opportunity to tighten up the other holes and anomalies in the law and regulation that let scams and dubious investments thrive.
Rob Yuille is a Manager, Retirement Policy at the ABI
We will be discussing pension scams other key issues at the ABI’s Transforming Long Term Savings Conference on 19th April.