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Pension liberation: Assessing the impact of Hughes v Royal London

The recent High Court Judgement in Hughes v Royal London has changed the pension transfers and liberation landscape, making it harder for pension administrators to protect people from scamming, warns Elaine Turtle, director, DP Pensions

On Friday 19 February 2016, the High Court delivered its findings over a significant judgement likely to affect the pension transfers landscape forever.

The High Court judgement in Hughes v Royal London was handed down on Friday afternoon by Mr Justice Morgan (Case No. CH/2015/0377) having originally been expected towards the end of January.

The reason for this case being so significant is down to it being a challenge to the Pensions Ombudsman’s decision on 30 June 2015 (PO-7126) in which he accepted the underlying reasons for Royal London deciding not to pay a cash equivalent transfer value to another pension scheme. The crux of the Pensions Ombudsman’s decision being the interpretation of the terms “occupational pension scheme”, “transfer credits” and “earner” as defined under the Pension Schemes Act 1993.

These definitions have formed the basis of a number of Pension Ombudsman decisions and it’s probably not untrue to say that most pension scheme administrators will refer to these cases when seeking to decide if they are obliged to make a transfer payment to another scheme, particularly where there are concerns about pensions liberation.

While most pension scheme administrators will be familiar with these definitions they are considered again here:

occupational pension scheme” means a pension scheme:

(a) that

(i) for the purpose of providing benefits to, or in respect of, people with service in employments of a description, or

(ii) for that purpose and also for the purpose of providing benefits to, or in respect of, other people, is established by, or by persons who include, a person to whom subsection (ii) applies when the scheme is established or (as the case may be) to whom that subsection would have applied when the scheme was established had that subsection then been in force, and

(b) that has its main administration in the United Kingdom or outside the EEA states,

or a pension scheme that is prescribed or is of a prescribed description.

“transfer credits” means rights allowed to an earner under the rules of an occupational pension scheme by reference to:

(a) a transfer to the scheme of, or transfer payment to the trustees or managers of the scheme in respect of, any of his rights (including transfer credits allowed) under another occupational pension scheme or a personal pension scheme, other than rights attributable (directly or indirectly) to a pension credit, or

(b) a cash transfer sum paid under Chapter 5 of Part 4 in respect of him, to the trustees or managers of the scheme”.

“earnings” and “earner”:

(a) “earnings” includes any remuneration or profit derived from an employment; and

(b) “earner” shall be construed accordingly”.

Ombudsman overstepped the mark

The Pensions Ombudsman in his determinations had decided earnings referred to earnings in relation to the employment relationship for which the scheme was being established.

Herein lies the rub. Mr Justice Morgan determined the Pensions Ombudsman had essentially exceeded his authority and read words into the definition as he interpreted it. The impact of this being, that as long as the individual has earnings from another source, not necessarily with the sponsoring employer of the pension scheme, this meets with the earnings definition and satisfies the test so the transfer can proceed.

As commented on earlier, this case is fundamental in determining how pension schemes will develop future due diligence and processes when dealing with the complex case of pension transfers and potential liberation. There will be a considerable number of transfers put on hold pending the results of this case.

Ultimately, this means that it will be more difficult for scheme administrators to stop transfers to schemes that they feel may be pension liberation schemes. As scheme administrators, when we ask for proof that a member is paid by the sponsoring employer of the scheme that they wish to transfer their pension away to, often we find that they are not paid, or are paid on a ‘self-employed’ basis or even on a zero hours contract. This has allowed scheme administrators, where they are suspicious of a scheme, to have refused the transfer when this proof of earnings is provided or no proof is forthcoming at all.

Government action needed

As a result of this judgement, it will really mean that the Government will have to ‘adjust’ the legislation around ‘the right to transfer’. The FCA and HMRC want scheme administrators to ‘police’ the transfers out of schemes, in order to stop liberation of members’ pension schemes. This is either people transferring to access their funds before age 55 or in some cases where the investments look too good to be true and people are likely to lose their funds due to a scammer.

In some cases, where they are accessing early and when their funds are taken and they do not receive the monies they thought they were going to get, they are also receiving a tax charge from HMRC on top of losing their pension scheme.

Time will tell how things will change but for some pension scheme members, it may be too late to stop the scammers accessing their funds.

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