SIPP and SSAS Update
Financial Guidance and Claims Act paves way for new guidance requirements and cold calling ban
The Financial Guidance and Claims Act 2018 received Royal Assent on 10 May 2018. The Act:
- provides for the creation of a single financial guidance body through merging Pension Wise, the Money Advice Service and TPAS (apart from the TPAS dispute resolution function, which has moved to the Pensions Ombudsman);
- requires the Government/FCA to make new rules which will require scheme trustees/managers to ensure that members with money purchase benefits receive or opt out of pensions guidance before taking or transferring their benefits; and
- gives the government the power to ban "cold calling" in relation to pensions and requires the Secretary of State to provide a timetable for doing so if he has not exercised the power by the end of June. No such regulations have yet been made, but the Government is consulting on the relevant regulations. The consultation closes on 17 August 2018. The Government says it intends to lay the regulations in autumn 2018 "Subject to Parliamentary timetabling".
New ICO guidance as GDPR comes into force
The General Data Protection Regulation (GDPR) came into force on 25 May. In the run up to that date, the Information Commissioner's Office (ICO) published more detailed guidance on various topics including:
- guidance on the "right to be informed", which includes guidance about fair processing notices;
- guidance on the "right of access" which includes guidance on dealing with data subject access requests; and;
- guidance on data protection impact assessments (DPIAs). The ICO has published a list of ten types of processing which automatically require a DPIA. This includes "invisible processing" where data about an individual is obtained from someone else and the data controller does not inform the individual about the processing on the grounds that this would be impossible or involve disproportionate effort.
The ICO has also consulted on its draft Regulatory Action Policy. Broadly, this indicates that the ICO's focus is likely to be on breaches which:
- are committed wilfully;
- result in losses or distress for individuals; or
- affect a large number of people.
The ICO will also consider whether a breach involves sensitive personal data.
In February the FCA and ICO published a joint update on the GDPR which said that while the ICO will regulate the GDPR, complying with the GDPR requirements is also something the FCA will consider under its rules.
HMRC U-turn on Trust Registration Service requirement under Money Laundering Regulations
Around the start of May, HMRC published new guidance which revealed a U-turn by HMRC on the question of whether trustees of schemes that have incurred a relevant tax liability under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 are required to register under the Trust Registration Service (TRS). Until publication of the most recent guidance, HMRC had been clear that registration was required. However, the latest guidance says that if the pension scheme has already been registered online with HMRC (under Manage and Register Pension Schemes or Pension Schemes Online) then the trustees do not need to register separately on TRS.
Master trust developments
We have previously reported on the introduction of legislation which will prohibit the operation of a master trust unless the scheme is authorised by the Pensions Regulator. Broadly, a master trust scheme is an occupational pension scheme which provides money purchase benefits and is intended for use by two or more unconnected employers.
Following consultation, the Government has now published its consultation response and revised draft regulations setting out the detail of the new authorisation regime. There have been some changes to the detail, but not to the fundamentals of the regime. The fee for applying for master trust authorisation is £41,000 for existing schemes and £23,000 for master trusts that only start operating after the requirement for master trust authorisation has come into force (expected to happen on 1 October 2018). Following consultation, the Pensions Regulator has laid before Parliament its code of practice on the authorisation and supervision of master trusts and published its consultation response.
There had been concern that some SSASs might be caught by the master trust authorisation regime, but this now seems unlikely, as the final form regulation contains an exemption aimed at SSASs (worded in similar terms to the SSAS exemptions that apply in many other areas of pensions legislation).
Finance Act 2018 receives Royal Assent, but pensions minister gives assurance re HMRC's de-registration powers
We have previously highlighted the introduction of new powers for HMRC giving it very broad discretion to de-register a scheme if the scheme has a corporate sponsoring employer that has been dormant for a continuous period of at least a month in the one year period leading up to the de-registration decision. The relevant provisions, contained in the Finance Act 2018, came into force on 6 April 2018. It has been reported in the pensions press that, following a lobbying campaign in which concerns were expressed about the breadth of HMRC's powers, pensions minister Guy Opperman has confirmed in a letter to an MP that, "HMRC would only de-register a scheme where it is satisfied that the scheme is not being operated for the provision of legitimate retirement benefits".
Trustee exclusion of personal liability under contract did not cover misrepresentation
The Court of Appeal has dismissed an appeal in the case of First Tower Trustees Limited v CDS (Superstores International) Limited, holding that a clause in a lease providing that a trustee company contracted "in their capacity as trustees of the Barnsley Unit Trust and not otherwise" only covered liability under the contract, not liability for pre-contractual misrepresentation. The upshot of the judgment is that the trustee company's liability for pre-contractual misrepresentation is not limited to the assets of the trust.
The case serves as a reminder that even where a trustee contracts in his capacity as such, his liability is personal and is not limited to the value of the assets of the trust unless that is specifically stipulated in the contract. The case also illustrates the importance of getting the drafting right in limitation of liability clauses. If such a clause is ambiguous, the courts will generally construe it against the person who drafted it and opt for the interpretation that gives it a narrower scope.
Tribunal holds HMRC wrong to deny tax relief for in specie contribution
The First-tier Tribunal (Tax) in the case of Sippchoice Limited v HMRC has found in favour of a SIPP provider that appealed against HMRC's denial of tax relief in relation to an "in specie" contribution by a member. However, HMRC has said that it plans to appeal. For more information on the First-tier Tribunal's judgment, see our e-bulletin.
Tribunal rejects argument that loan to sponsoring employer LLP was loan to member
The First-tier Tribunal (Tax) in the case of Bayonet Ventures LLP v Revenue and Customs Commissioners has rejected an argument by HMRC that a loan by a SSAS to the LLP sponsoring employer amounted to a loan to the scheme member where the scheme member was also a member of the LLP. HMRC had based its argument on section 863 Income Tax (Trading and Other Income) Act 2005 (ITTOIA) which provides that for income tax purposes, if an LLP is trading with a view to making a profit:
- all the activities of the limited liability partnership are treated as carried on in partnership by its members (and not by the limited liability partnership as such),
- anything done by, to or in relation to the limited liability partnership for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to the members as partners, and
- the property of the limited liability partnership is treated as held by the members as partnership property.
HMRC argued this meant the loan to the LLP was effectively a loan to the scheme member of the SSAS. In the case in question, HMRC's argument failed because the LLP in question had been dormant in the relevant tax year, not trading with a view to making a profit, so section 863 was of no relevance. However, the tribunal went on to consider whether HMRC's argument would have succeeded had the LLP been trading with a view to making a profit. It said that HMRC's interpretation was wrong, as HMRC had ignored the words "in partnership" and "as partners" etc in section 863. The tribunal said that treating property as partnership property was not the same as treating it as the property of the individual partners, as partnerships (whether LLPs or not) were recognised as having a separate "legal persona".
We think it is important to appreciate that the tribunal's view on this point is not legally binding on other tribunals and courts. As the Bayonet judgment is very recent, it is not yet clear whether HMRC will accept the tribunal's view of section 863 or whether HMRC will continue to argue that section 863 means that a loan to an LLP amounts to a loan to the LLP's individual members, and that a loan to an LLP therefore gives rise to an unauthorised member payment if a member of the LLP is also a member of the scheme.
Tribunal holds members liable for unauthorised payments charges and surcharges despite having acted in good faith
In the case of McCormack v Commissioners for HMRC, the First-Tier Tribunal (Tax) has upheld the imposition by HMRC of unauthorised payments charges and unauthorised payments surcharges on members who transferred their benefits to a scheme which turned out to be a pension liberation vehicle and received payments which were unauthorised payments. The judge accepted that the members had acted in good faith, but held it was not necessary for there to be any dishonesty or negligence on the part of a taxpayer for liability to an unauthorised payments surcharge to arise, and the fact that he or she had taken legal, accounting or tax advice was not sufficient of itself to make imposition of a surcharge unjust or unreasonable. The judgment indicates that the specific cases considered were serving as "lead cases" for a number of other individuals who had been assessed to unauthorised payments charges and surcharges as a result of participating in the same arrangements.
Supreme Court rules notice did not take effect until employee had read it
In Newcastle upon Tyne Hospitals NHS Foundation Trust v Haywood the Supreme Court held that an employer's written notice did not take effect until the employee had an opportunity to read it. For more detail, click here.
Berkeley Burke Group Litigation Order
The High Court has approved an order to allow group litigation against SIPP provider Berkeley Burke by a number of claimants who allege that they were mis-sold SIPPs by unregulated introducers who carried out regulated activities without the requisite permissions and that Berkeley Burke was in a joint enterprise with the introducers.
FCA intervention in Carey Pensions mis-selling case
The FCA was given permission to intervene in the case of Adams v Carey Pensions UK LLP in which the court is being asked to rule on the obligations of a SIPP operator in the context of investments made by members on an "execution only" basis following contact with unregulated introducers. The case was heard in March and we understand judgment is expected to be handed down imminently.
New Scottish rates of income tax: HMRC clarifies how it will operate relief at source
From tax year 2018/19, different rates of income tax have applied to Scottish taxpayers (broadly, individuals resident in Scotland). For occupational pension schemes which operate a "net pay arrangement" whereby member contributions are taken from pay before tax is deducted, members effectively automatically get tax relief at their marginal rate of income tax. However, the impact of Scottish rates of income tax for schemes operating relief at source was less clear. In February 2018 HMRC published a newsletter to address this.
For schemes operating relief at source in tax year 2018/19, scheme administrators will continue to give tax relief at the basic rate of 20% for all taxpayers. HMRC will not attempt to claw back tax to reflect the fact that the starter rate for Scottish taxpayers will be 19%. However, no adjustment will be made by scheme administrators to reflect the fact that Scottish taxpayers will pay income tax at the "intermediate" rate of 21% on income between £24,001 and £43,430. It appears that Scottish taxpayers who do not complete a tax return will need to contact HMRC to request an adjustment to their tax code if they want to get tax relief at the intermediate rate of 21%. HMRC indicates that it has not yet decided whether to adopt the 2018/19 approach long-term or make changes for subsequent tax years.
HMRC's Pensions schemes newsletter 96 provides information on other pensions tax implications of the introduction of Scottish rates of income tax for the tax year 2018 to 2019.
Regulations prompted by the introduction of Scottish rates of income tax, which came into force on 6 April 2018, bring forward reporting deadlines for pension schemes that provide member tax relief via relief at source rather than a net pay arrangement.
From tax year 2019/20, the Welsh Government will have the power to set income tax rates for individuals resident in Wales. Whether this will result in any immediate changes remains to be seen, as the Welsh Government could choose to set rates at a level which means that Welsh taxpayers pay identical rates to those resident in England. A BBC report dated 5 June 2018 says, "The Welsh Government has vowed not to increase tax rates during the current assembly term, ending in spring 2021."
HMRC clarifies application of "genuine errors" guidance to IFAs
In Pension schemes newsletter 99, HMRC clarifies the application of its "genuine errors" guidance to IFAs. The guidance deals with the circumstances in which HMRC will regard a payment which would otherwise have constituted an unauthorised payment or pension contribution as not being such a payment on the grounds that it was made in genuine error, there was no intention to make the payment to that extent or at all and the error is rectified as soon as reasonably possible.
HMRC says the guidance can be applied to the actions of an IFA or other agent where all of the following apply:
- there’s a clear authority for the IFA or agent to act on behalf of the member;
- there’s a clear instruction from the member as to what form the transaction should take;
- as a result of a clerical error the form of the transaction is not what the member intended;
- the error is spotted and reported to the scheme immediately;
- had the error been made by the member the scheme administrator would have applied the genuine error guidance.
The guidance can not be applied where:
- the member has changed their mind;
- the error is more than clerical;
- the IFA or agent has given advice they now regret and wish to undo the transaction.
Latest on Manage and Register Pension Schemes Online Service
On 4 June 2018, HMRC published its Manage and Register Pension Schemes service newsletter setting out details of the introduction of the new Manage and Register Pension Schemes Online service. Applications to register a pension scheme must now be made through this service. It is planned to introduce new functionality to the system in phases, detailed in the newsletter, so that ultimately scheme reporting will be done via the service.
Parliament's Work and Pensions Committee raises concerns about unsuitable SIPP investments
Frank Field, the Chair of Parliament's Work and Pensions Committee has written to the FCA raising concerns about SIPPs being used to channel individuals' pension savings into unsuitable investments. The letter asks whether the FCA is considering barring unregulated or non-standard investments as SIPP investments altogether. In its reply, the FCA says that it is not, believing that suitable advice from financial advisers and effective due diligence checks by SIPP operators are a more proportionate way of preventing harm to consumers.
The FCA's letter alludes to its intervention in the Carey Pensions mis-selling case (see above) in which it says it summarised what it expects a SIPP operator to do in terms of due diligence. This includes:
- taking reasonable steps to ensure it does not accept an asset likely to give rise to tax liabilities within the scheme;
- taking reasonable steps to ensure that an investment is genuine and not part of a fraud or scam;
- ensuring that the operator or its trustee has proper custody of and good title to the underlying asset; and
- ensuring it only accepts assets in relation to which it will be able to undertake realistic annual valuations.
FCA and Pensions Regulator announce pensions regulatory strategy
The FCA and Pensions Regulator have announced that they are working together on a pensions regulatory strategy which will set out how they will work together to tackle the key risks facing the pensions sector in the next five to ten years.
Consultation on non-workplace pensions
Earlier this year the FCA consulted on non-workplace pensions such as SIPPs. The FCA expressed concern that competition may not be working well in the market due to buyer-side weaknesses and is considering whether it is necessary to go further to protect consumers. It says that later in 2018 it plans to publish a paper which will provide feedback on the themes arising from the responses to the consultation. If the evidence demonstrates the existence of consumer harm, it will subsequently consult on proposals to remedy this.
FCA considers ban on contingent charging structures
The FCA has consulted on measures aimed at improving the quality of pension transfer advice where a member is considering transferring benefits from a defined benefit to a money purchase arrangement. This includes seeking views on whether it should introduce a ban on contingent charging, which is when a fee for advice is only paid when a transfer goes ahead. Other possible measures include raising the level of qualifications required for pension transfer specialists and guidance to illustrate how firms can carry out an appropriate ‘triage’ service (an initial conversation with potential customers by providing generic, balanced information on the merits of pension transfers without this legally amounting to "advice").
At the same time as it published the consultation, the FCA also published new rules on pension transfer advice. These include requiring all advice on pension transfers to be a personal recommendation. Following consultation, the FCA has decided to maintain its existing position that an adviser should start from the assumption that a transfer from a defined benefit to a money purchase arrangement will be unsuitable.
Non-advised drawdown sales review findings
On 28 March the FCA published its findings on its review of non-advised drawdown sales. The FCA found that:
- firms are broadly meeting their obligations to communicate clearly with customers;
- sales processes are continuing to evolve with firms allowing online transactions and providing online tools and calculators to help customers make informed decisions;
- however, some customers appear not to be fully engaging with the information and are therefore potentially putting themselves at risk of harm;
- there were some where firms did not fully meet FCA requirements.
The FCA says that its findings and the Retirement Outcomes Review final report will inform the FCA and The Pensions Regulator’s joint strategic approach to the pensions and retirement income sector, due to be published later this year.
FCA amends guidance to refer to Pensions Ombudsman referrals
With effect from 1 April 2018 the FCA amended its guidance on dispute resolution to refer to firms making eligible complainants aware of their right to refer complaints to the Pensions Ombudsman, where relevant, in addition to their rights to refer complaints to the Financial Ombudsman Service.
Final findings of Retirement Outcomes Review
On 28 June the FCA published the final findings of its Retirement Outcomes Review which looks at how the retirement income market is evolving since the pension freedoms were introduced in April 2015. As part of this, the FCA sets out a package of proposed remedies to address the concerns identified.
The review focused on those consumers who do not take advice. It found that:
- most consumers choose the 'path of least resistance', accepting drawdown from their current pension provider without shopping around;
- one in three consumers who have gone into drawdown recently are unaware of where their money was invested;
- some providers were ‘defaulting’ consumers into cash or cash-like assets, but holding cash is highly unlikely to be suited for someone planning to draw down their pot over a longer period;
- charges for non-advised consumers vary considerably from 0.4% to 1.6% between providers, and are, on average, higher than in accumulation;
- drawdown charges can be complex, opaque and hard to compare;
- so far, there has not been significant product innovation for mass-market consumers.
The FCA has published Consultation Paper CP18/17 which contains proposals to address the issues it has identified.
The FCA is proposing changes to require 'wake up packs' to:
- incorporate a one-page ‘headline’ document, in clear and accessible language
- be sent earlier in the process, from age 50, and every five years thereafter until the pot is accessed.
- include risk warnings, from age 50 onwards.
It is seeking feedback on proposals that:
- providers should offer ready-made drawdown investment solutions which reflect standardised consumer objectives;
- new consumers accessing drawdown will have to make an active choice to be in cash. The FCA also expects firms to have a strategy for dealing with consumers who have already been defaulted into cash, and who are unlikely to be best served by this strategy;
- providers should send information to their customers in drawdown annually, whether or not they are currently drawing an income from their pot;
- firms should remind customers in drawdown annually of their chosen investment pathway and ability to switch.
Government and FCA respond to Law Commission recommendations on pension funds and social investment
On 18 June the Government and FCA published a joint response to the Law Commission recommendations on pension funds and social investment. Whilst most of the Law Commission's recommendations were aimed at large occupational pension schemes, the FCA has responded to those aspects of the recommendations relevant to personal pension schemes.
The FCA intends to consult on rule changes in the first quarter of 2019 requiring independent governance committees (IGCs) of personal pension schemes to report on their firm’s policies on:
- evaluating environmental, social and governance (ESG) considerations, including climate change;
- taking account of members’ ethical concerns; and
At the same time, the FCA will also consult on introducing related guidance for providers of workplace personal pension schemes on considering financial factors (such as ESG risks and climate change) and non-financial factors (such as responding to members’ ethical concerns) when making investment decisions. The consultation will form part of a wider package of rule changes including other possible extensions to the remit of IGCs.
The Law Commission also proposed that the FCA should consider guidance on the types of investments that can be made by unit-linked funds (its "permitted links" rules) to clarify how pension schemes can manage some element of illiquid investment within their funds. The FCA says it will progress work on its permitted links rules in the second half of 2018.
"Dear CEO" letter on cryptoassets and financial crime
On 11 June the FCA issued a "Dear CEO" letter to banks highlighting the financial crime risks posed by cryptoassets such as Bitcoin which offer potential anonymity and the ability to move money between countries. The letter refers to "initial coin offerings" (ICOs), events where digital tokens are offered to the public in exchange for investors' capital, and says that retail customers contributing large sums to ICOs may be at a heightened risk of falling victim to investment fraud. Although the FCA's letter is aimed at banks rather than SIPP operators, the risks for individual investors are potentially relevant to SIPP members wishing to invest in cryptoassets.
FCA reverts to original definition of "vulnerable consumer"
In its "Our Approach to Consumers" document published on 17 July 2018, the FCA announced that it has decided to revert to its original definition of a "vulnerable consumer" as "someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care". In its "Our Future Approach to Consumers" consultation paper, the FCA had proposed the definition, "People who can readily be identified as significantly less able to engage with the market, and/or people who would suffer disproportionately if things go wrong". Some respondents to the consultation suggested that the original definition had already been adopted and put into practice by many organisations, and that the revised wording risked narrowing the definition and shifting the responsibility more towards the consumer to "self-identify a vulnerability". The FCA plans to consult early in 2019 on guidance for firms on the identification and treatment of vulnerable customers.
Alongside its "Our Approach to Consumers" document, the FCA also published a discussion paper seeking views on whether there is a gap in the FCA's existing regulatory and legal framework which should be addressed by introducing a new general "duty of care" on the part of FCA-regulated firms and, if so, what that duty should encompass. The deadline for responses to the discussion paper is 2 November 2018.
- Pensions Ombudsman
Ombudsman increases awards limit for non-financial injustice
The Pensions Ombudsman's annual report for 2017/18 says that the Ombudsman has decided to increase the normal limit for awards for non-financial injustice to £2000. This means that the range for awards for non-financial injustice is now £500 to £2000, save that the Ombudsman may award more in exceptional circumstances. The report also says, "We are drafting guidance outlining fixed levels of awards (including those falling within the £500 to £2,000 range) and in which circumstances these are likely to be made. However, every case will be considered individually on its facts."
Ombudsman holds expression of wish form invalid and substitutes own decision on death benefits
In the case of Miss A (PO-12332), the Ombudsman has held an expression of wish form to be invalid and taken the unusual step of substituting his own decision for that made by the trustees. The Ombudsman also ordered the scheme's administrator to pay three beneficiaries £2000 each for the distress and inconvenience caused by its maladministration. The case carries important lessons for professionals involved in the operation of SSASs and SIPPs, particularly around:
- the importance of ensuring that expression of wish forms are completed properly;
- the need for robust death benefit decision-making processes that are not overly reliant on expression of wish forms, particularly where trustees are family members of the deceased who may have a conflict of interest.
The member died in November 2013 while an active member of a SSAS, the rules of which provided for payment of a death benefit held on discretionary trusts. At the time of the scheme's establishment in March 2004, the member had signed an expression of wish form, but not filled in details of his chosen beneficiary himself. The member's brother, also a member trustee of the SSAS, added his own name as nominated beneficiary on the member's form and placed his initials next to his amendment. He gave evidence to the Ombudsman that he would not have amended the form in this way had it not reflected his brother's wishes at the time.
In August 2013, the member had made a will which provided for the residue of his estate to be divided between his three adult daughters in equal shares. It was not clear from the evidence whether the member (wrongly) believed that his pension fund would pass under his will.
Following the member's death, the SSAS trustees, comprising the member's brother, the member's brother's ex-wife and a professional trustee decided to pay the whole of the death benefit to the member's brother in accordance with the expression of wish form. One of the member's daughters, Miss A, complained to the Pensions Ombudsman.
The Ombudsman held that the circumstances of the manner in which the expression of wish was completed and relied upon rendered the expression of wish form invalid and that the trustees should not have relied on it when making their decision. Normally, if the Ombudsman finds that a trustee decision has been improperly made, he directs the trustees to make their decision afresh. However, citing the case of Saffil Pension Scheme v Curzon, the Ombudsman said that he was entitled to make the decision instead if the trustees had had access to all the necessary information and yet reached a perverse decision. In the present case, the Ombudsman noted that the trustees had failed to request other evidence and had instead given maximum weight to an invalid expression of wish form. Having reviewed their decision following representations by Miss A, they had adopted a similarly inappropriate reconsideration process.
In the circumstances, the Ombudsman decided to assess the distribution that a reasonable trustee would make. He ordered the death benefit to be divided equally between the member's brother and the three adult daughters. Although the brother had improperly amended the expression of wish form, the Ombudsman found him to be an otherwise credible witness who had provided help and support to the member over the years, including ensuring that when the member became too ill to work, he continued to receive a salary from the business that the two brothers had run jointly.
The Ombudsman ordered the scheme's administrator to pay the member's three daughters £2000 each to compensate them for the "exceptional inconvenience and distress" caused by its maladministration. The professional trustee company and the scheme administrator were separate companies within the same group. The Ombudsman was critical of the professional trustee and administrator's processes for dealing with death benefit decisions which, due to costs concerns, did not involve a meeting or even a conference call to discuss the circumstances of the deceased and whether the trustees had all relevant information to enable them to make a decision. Notably, the determination strongly suggests that the Ombudsman's deliberately chose to make the order against the administrator rather than the trustee company because the trustee company would have been entitled to be indemnified from scheme funds in respect of its liability whereas the administrator was not.
Complaint upheld where trustees made implementing pension sharing order conditional on selling scheme property
The Pensions Ombudsman has upheld a complaint (Ms Y, PO-1196) against the trustees of a SSAS who failed to implement a pension sharing order in favour of a member's ex-wife. Around the time that the scheme trustees received the pension sharing order in 2010, the member's fund comprised cash plus a quarter share in a property. The cash attributable to the member's fund was insufficient to pay the ex-wife the full cash equivalent transfer value to which she was entitled. The scheme had three other members whose funds each also comprised cash plus a quarter share of the property, and the total cash held within the scheme would have been sufficient to pay the ex-wife's cash equivalent. However, the other trustees were not keen to exchange the cash held in respect of their funds for a greater share of the property, the value of which was less certain.
The ex-wife complained to the Ombudsman in 2012, but the Ombudsman's investigation was subsequently suspended for a long period pending attempts by the member trustees to resolve various disputes which impacted the value of scheme assets. The Ombudsman's office resumed involvement around 2017. The Ombudsman held that the trustees should have implemented the pension sharing within four months of having received it, which meant that it should have been implemented by June 2010. As there had been sufficient cash held within the scheme as a whole to pay the pension credit, he held that each of the member trustees should have transferred money from his member's fund to finance the pension credit. The other member trustees could then have claimed back the cash from the sale proceeds once the property had been sold. However, the trustees had effectively made the property sale a pre-condition of implementing the pension sharing order.
The Ombudsman ordered the trustees to implement the pension sharing order based on the estimated value of the property in May 2010, namely £850,000, notwithstanding that when the property had eventually been sold in June 2013 it had only fetched £700,000. He also awarded interest from May 2010 to the date of transfer to the ex-wife's pension arrangement, plus £2500 for distress and inconvenience.
This determination highlights a number of significant issues for SSASs:
- all member trustees have a responsibility for administering the scheme, so giving effect to a pension sharing order on divorce is the responsibility of all trustees, not just the member getting divorced;
- the potential for a pension sharing order to give rise to a need to realise scheme assets within a short timeframe and earlier than may have been anticipated;
- whilst individual assets may notionally be allocated to individual members for the purposes of calculating their fund values, the legal position is usually that all assets are assets of the scheme as a whole; and
- if delay in implementing a pension sharing order results in loss to the ex-spouse, the Ombudsman may order the trustees to pay compensation.
Ombudsman holds scheme rules cannot override statutory right to a transfer value, but trustees free to offer in specie transfer value
In the case of Mr T (PO-18431), the Ombudsman has held that scheme rules could not override a member's statutory right to a transfer value. However, the Ombudsman held that the cash equivalent transfer value legislation did not give the member a right to be paid a transfer value in cash and that the scheme trustees could offer a transfer value in specie.
The scheme literature provided to the member had made clear that the investment strategy was to target a 5% per annum return over a 10 year period, and that significant penalties would apply to early redemption. The scheme's trust deed and rules provided that the trustees would comply with cash equivalent transfer value legislation, but then stated that the investment period was for 10 years and that trustee approval would be required to a transfer out, with the wording suggesting that this would only be permissible in exceptional circumstances.
The decision that scheme rules cannot override a statutory right to a transfer value is unsurprising, but we doubt that it is correct as a matter of law that a scheme can comply with a statutory transfer obligation by offering an in specie transfer rather than cash. The scheme trustee's response to the complaint stated that as some funds were in pooled investments, early disinvestment would affect other members, not just the member instigating the disinvestment. This may have influenced the Ombudsman's determination in this case.
Ombudsman holds trustees should have done more to explain options to terminally ill member
In the case of the Estate of the late Mr R (PO-17639), the Ombudsman has held that scheme trustees should have done more to explain benefit options to a terminally ill member and has ordered the trustees to increase the widow's pension to the amount which the widow would have received had the member brought his pension into payment before death, and to pay the member's estate the lump sum which the member would have received had he brought benefits into payment before death.
The member had been diagnosed as terminally ill in November 2012. At that time he was a deferred member of the scheme. In April 2016 the member contacted the scheme administrator by telephone to discuss his options under the scheme. He informed the administrator that he was terminally ill. Shortly afterwards, the scheme administrator wrote to the member setting out two options: 1. a cash lump sum of about £19,000, an annual pension of about £12,000 pa and a widow's pension of about £7000 pa; or 2. a cash lump sum of about £61,000, a pension of about £9,000pa and a widow's pension of about £7,000. The letter also flagged the possibility of taking all benefits as a tax free lump sum if the member could provide medical evidence that his life expectancy was less than one year.
The member died in August 2016 without having exercised any of the options outlined in the administrator's letter. His widow was informed that she would receive a widow's pension of approximately £5500 pa. She queried why this was less than the figure previously quoted and why there was no lump sum. The scheme administrator explained that the figures previously quoted were benefits available to Mr R during his lifetime as a pensioner member of the scheme. As the member had remained a deferred member, the benefits would be calculated accordingly, meaning that the widow's pension was lower and there was no lump sum. The widow complained that the trustees had failed to make clear to the member that his estate and his widow would be severely disadvantaged if benefits were not taken during his lifetime.
The Ombudsman upheld the complaint. He held that the trustees had a fiduciary duty to provide Mr R with the relevant information to enable him to make a fully informed decision about his options under the scheme. The trustees had breached this duty because the way in which the options were presented meant that it would not have been clear to Mr R that the two options presented would not remain available on his death, particularly as the letter did not mention what benefits would be payable on death in deferment. Given that the trustees knew that the member was terminally ill and that benefits payable to his widow and estate would be considerably lower if no action was taken during his lifetime, the Ombudsman found that the trustees should have satisfied themselves that Mr R had actually received the letter and that he understood the significance of the information it contained.
The Ombudsman ordered the trustees to pay to the member's estate the lump sum which would have been payable had the member chosen option 2 during his lifetime, and to pay to the member's widow the widow's pension which would have been payable had the member chosen option 2 during his lifetime.
This determination relates to a defined benefit scheme. The issue of survivor benefits being much lower if benefits are not taken during a member's lifetime is generally likely to be less acute in a SIPP or SSAS context where there is a finite member's fund from which benefits can be provided. Nevertheless, the determination highlights that where schemes are communicating benefit options, such communication should make clear how the position will change in the event that the member dies before selecting an option.
If trustees are on notice that a member's request for benefit options has been prompted by the fact that a member is terminally ill, this determination suggests that the Ombudsman will expect the trustees to check that information sent has actually been received. It is also good practice to suggest that the member should take independent financial advice, particularly in a SIPP and SSAS context where the tax consequences of making particular choices might be significant, but not necessarily obvious to most members.
Expansion of dormant assets scheme to include pension products
The Government has announced the appointment of four "industry champions" to work on expanding the "dormant assets scheme" to include more types of asset including pension products. The current Dormant Accounts scheme allows bank or building society accounts that have been left completely untouched for more than 15 years to be used for good causes. Participation in the scheme is voluntary. The Independent Dormant Assets Commission has recommended that the scheme should be expanded to include (among other things) pensions products, though it recognises that a different definition of "dormancy" will be required in the context of pension products. It suggests this could be based on the customer being untraceable seven years after the end of the contractual term, or the customer being notionally over 120 years old in cases where there is no contractual term.
ABI framework on "Gone Away" customers
The ABI has published a "Framework for the Management of 'Gone-Away' Customers in the Life and Pensions Market. The Framework is "designed to help firms operating in the life and long-term savings market to better identify, trace, verify and manage those customers with whom they have lost contact (‘gone-aways’), to assist them in reengaging with such customers in a timely manner."
Code of practice on combating pension scams updated
The Pension Scams Industry Group (former the Pension Liberation Industry Group) has updated its code of good practice on combating pension scams. The Code is not legally binding, but has the backing of a number of stakeholders in the pension industry including the PLSA.
Changes to the revised Code include:
- a checklist of risk indicators for SSASs and additional examples of information which transferring schemes can consider when conducting due diligence on a SSAS, eg whether there is an employment link between the member and SSAS employer and, if not, why the member wants to transfer to the SSAS;
- information on the use of "international SIPPs" as scam vehicles;
- the suggestion of contacting the member by telephone as part of the due diligence process and /or referring the member to TPAS if the proposed transfer raises concerns;
- information on applying to the Pensions Regulator for an extension of the usual six month time limit for the payment of a transfer;
- detailed guidance on reporting potential scams to Action Fraud; and
- expanded example letters
Government to examine processes for payment of pensions tax relief
In a statement in the House of Lords on 25 June referring to the differences between relief at source and net pay arrangements in the context of auto-enrolment, the Government has said it will "examine the processes for payment of pensions tax relief for individuals to explore the current difference in treatment to ensure that we can make the most of any new opportunities that emerge". The differences between the two systems are particularly significant for those with incomes below the income tax personal allowance who are entitled to an HMRC top up equivalent to basic rate tax relief where the scheme operates relief at source, but miss out on this top up if the scheme provides tax relief via a net pay arrangement.
TRIG industry-wide framework for improving transfers and re-registrations
The Transfers and Re-registration Industry Group (TRIG) has published an "Industry-wide framework for improving transfers and re-registrations" summarising the TRIG's agreed position on what pension providers are expected to deliver to customers in relation to the timeliness of transfers and re-registrations of scheme assets and communications during the process. The TRIG is comprised of various pensions-related associations including the Association of Member-Directed Pension Schemes (AMPS), the Society of Pension Professionals (SPP), the ABI and the PLSA. The Framework is not legally binding, but the associations in the TRIG endorse the Framework (available from the websites of the relevant associations) and encourage their members to adopt it.