Member transfers, trustee due diligence and scorpion schemes: The Pensions Ombudsman’s view
The Pensions Ombudsman (TPO) has considered the duties of Trustees to undertake due diligence on receiving schemes and provide warnings to members upon receipt of a pension transfer request.
In 2014, Mr N, a deferred member of the Police Pension Scheme (PPS), applied to transfer his pension benefits from the PPS to the London Quantum Retirement Benefits Scheme (LQRBS).
It now appears that LQRBS was part of a pension liberation scheme. In 2015, The Pensions Regulator (TPR) appointed an independent trustee to LQRBS, who is currently trying to establish the funds that may be returned to members.
Mr N brought a complaint to TPO against the PPS trustees for failing to conduct adequate due diligence in relation to LQRBS and for failure to provide him with TPR’s February 2013 warning guidance on ‘Scorpion Schemes’.
TPO upheld the complaint. It held that the PPS trustees should have provided Mr N with TPR’s warning guidance as recommended and should have identified the following red flags for pension liberation:
- LQRBS was a newly registered scheme and sponsored by a newly registered employer;
- The sponsoring employer was based in London, geographically far from Mr N; and
- The sponsoring employer did not employ Mr N – he continued to be employed by the police, and only in certain circumstances may a police officer be allowed to have a second employment.
TPO went on to conclude that if these steps had been taken, the involvement of an unregulated introducer (Viva Costa International) and the type of investments involved in LQRBS would have been identified, and Mr N likely would not have made the transfer.
The PPS trustees were criticised by TPO for not having obtained a copy of LQRBS’ trust deed and rules to ensure the statutory requirements for a transfer were met. It added that the overriding consideration for trustees “must be to evaluate the transfer application carefully in order that a valid statutory transfer right is complied with and an invalid transfer is legitimately withheld”.
TPO added that section 99(1) of the Pension Schemes Act 1993, which provides a statutory discharge on transfers out of a scheme, had not been complied with, as the trustees had not observed the requirement to have “done what is needed to carry out what the member requires” since an appropriate level of due diligence had not been completed and warnings had not been issued to the member.
Consequently, TPO directed the PPS trustees to reinstate Mr N’s pension in the PPS and to pay £1,000 to Mr N for inconvenience and distress.
This transfer took place before the requirement for members with DB benefits worth over £30,000 to take independent financial advice from an FCA-authorised adviser. It is also in the context of pension liberation schemes. However, it still underlines the importance of careful consideration before a pension transfer is arranged, and the potential pitfalls for trustees in this process. Amongst other things, Trustees should familiarise themselves with TPR’s 2013 guidance on pension liberation fraud, which contains other red flags to look out for, including the following which TPO outlined in its decision:
- Receiving scheme not registered, or only newly registered, with HM Revenue & Customs;
- Member is attempting to access their pension before age 55;
- Member has pressured trustees/administrators to carry out transfer quickly;
- Member was approached unsolicited;
- Member informed that there is a legal loophole; and
- Receiving scheme was previously unknown, but now involved in more than one transfer request.