If you could have seen my face when the judgement in the case of Hughes v Royal London came through then, like the ghost of Hamlet’s father, it would have revealed “a countenance more in sorrow than in anger.”
There has been an ongoing debate amongst providers, trustees and advisers about how far trustees can or should go when confronted with a member intent on transferring pension rights to a scheme that they have real concerns about in terms of the risk of pension so-called liberation or it being an outright scam. What do you do if you have followed all the regulatory guidance, drawn the member’s attention to the Scorpion campaign literature, set out your concerns to him or her in black and white and the member still wants to exercise their statutory right to transfer?
The Hughes v London case was appealing a Pension Ombudsman (PO) decision which had turned on whether a member satisfied the meaning of “earner” within the meaning of Section 181 (1) of the Pension Schemes Act 1993, which in turn incorporates a definition of earner from the Social Security Contributions and Benefits Act 1992.
I appreciate that quoting all this legal stuff is a bit dry, but please stay awake and stay with me because it’s important. To be a statutory transfer to an Occupational Pension Scheme (OPS) a member has to acquire “transfer credits” in the receiving scheme and to acquire transfer credits a member must meet the above definitions of “earner”
Cutting to the chase, the PO had concluded that, as Miss Hughes had no relevant earnings from the Principal Employer in the scheme she was not an ‘earner’ within the meaning of the relevant legislation and so her request for a cash equivalent transfer value was not for securing transfer credits. Consequently she had no statutory right to take a cash equivalent transfer value. Therefore Royal London was within their rights not to process the transfer request.
Interestingly, the Principal Employer of the OPS to which Miss Hughes was seeking to transfer to was clearly concerned that this legislative definition might present a barrier to members joining its scheme and had developed a cunning plan to address the point. The PO’s decision notes at paragraph 78:
“Miss Hughes has provided an employment agreement between herself and the principal employer, dated 4 June 2014 (the day after the SSAS was registered with HMRC). Clause 4 says that she will receive “such remuneration as is agreed with the Company in respect of any hours worked”. There is no further detail of any such agreement but, in any event, the company is not trading and Miss Hughes does not currently receive a salary. The literature provided to Miss Hughes by First Review Pension Services on how to establish the SSAS indicates that the company is not intended to trade. So she has not received remuneration from an employer that is connected to the Scheme.”
There is nothing illegal about an individual entering into a meaningless contract from which they derive no benefit. This would be the case even where an individual sets up a non trading company with themselves as sole director followed very closely afterwards by a SSAS with the non-trading company as principal employer. In Hughes v London the existence of Miss Hughes contract was not central to Mr Justice Morgan’s ultimate decision on the appeal
Instead Mr Justice Morgan concluded, in effect, that the PO had misinterpreted the relevant legislation. He held that a person meets the definition of “earner” if they have earnings from any source and that the remuneration need not come from an employer associated with the OPS to which a member is transferring. Hence Miss Hughes had a statutory right to transfer to the OPS in question here.
There was a secondary argument around the fact that even if Miss Hughes didn’t have a statutory right to transfer, the rules of the Royal London Personal Pension Scheme gave Royal London a discretionary power to make a transfer which, Miss Hughes contended, it should have exercised to allow the transfer. Because he found that Miss Hughes did have a statutory right to transfer Mr Justice Morgan did not consider that argument.
So does it move the debate on for trustees, providers and their advisers?
Not really, I’m afraid. It simply confirms that just about anybody who is earning has a statutory right to transfer their pension benefits wherever they like. Trustees have a fiduciary duty to act in the interests of the members, which can conflict with their statutory obligations to members. It is still open to trustees or providers to decide not to pay a transfer where it has well founded concerns about the bona fides of a particular scheme and place the final decision in the hands of the PO, tPR or the courts. The decision in this case does not address and was not asked to address that conflict.
However the judgement found that Miss Hughes is “entitled to require” Royal London to transfer her cash equivalent and this may be enough to tip the scales for most trustees and providers to take the path of least resistance and pay such transfers.
If that is the case we should remember that complaints have been made to the PO where trustees or providers have complied with a statutory transfer request and transferred funds to a scheme where members have then lost out because of so-called liberation or a scam. Sorry members, you can’t have it both ways. Ultimately, there still has to be a place for personal responsibility and caveat emptor in such transactions, particularly where trustees or providers have made clear their concerns to members.
And if this was about pure so-called liberation part of me would say, ok, if you’ve been made aware of the risks, are prepared to take the tax penalty and are making an informed choice then, fine, off you go and ruin your retirement prospects, we did our best to warn you.. But increasingly these scams are not about pension so-called liberation but about getting unsophisticated investors to sink their pension savings into, at best inappropriate and high risk investments and at worst investments which are downright fraudulent.
The scammers are out there and plotting how they get their hands on the potential wall of cash in peoples’ hands as a result of the introduction of pension freedoms.
This is not scaremongering. This is happening.
Research published last week by Retirement Advantage has shown that, in the past three months, 35% of savers over 55 years old have been targeted by scammers offering free pension reviews or investment opportunities. This is an increase from figures released in June 2015, showing that one in five people over 50 had been approached by would-be scammers. As the people being approached here are over 55 this is not about pension so-called liberation, its about separating individuals from their retirement pots.
At Dalriada we have seen the devastation and problems these scams wreak on often vulnerable individuals.
I have no doubt that Mr Justice Morgan’s decision and interpretation is correct in law. Equally I am in no doubt that it has made life that little bit easier for the scammers and a little bit harder for those seeking to protect their members pension benefits.