In the case of Mr N (PO-12763) the Ombudsman has upheld a complaint against Northumbria Police Authority for not undertaking adequate checks before processing a member's request to transfer out of the Police Pension Scheme.
The member said that it was only following the transfer that he realised with concern that he had signed up to a high risk investment as a "sophisticated investor". The Ombudsman has ordered the Authority to reinstate the member's accrued benefits in the Police Pension Scheme or provide equivalent benefits, though on the basis that the Authority will be entitled to recover from the member any amount which the trustee of the receiving scheme recovers in respect of the member's benefit.
The Authority had sought to rely on legislation which provides that trustees of the transferring scheme are discharged from any obligation to provide benefits to which the transfer value related where "the trustees or managers of the scheme have done what is needed to carry out what the member requires" following the exercise by the member of his statutory right to a transfer value. However, the Ombudsman held that "what is needed" includes appropriate review of the transfer application, taking into account the law and regulatory guidance, and that "what the member requires" could only be established by ensuring that the appropriate due diligence was carried out, and any warnings or concerns identified and brought to the attention of the member. Applying these tests, the Ombudsman held that the Authority was not entitled to rely on the statutory discharge. In particular, the Ombudsman criticised the Authority for:
- not sending the member a copy of the Pensions Regulator's "scorpion" leaflet warning about the dangers of pensions liberation. It was not sufficient that the Authority had simply made the leaflet available to all members via a link on its newsfeed;
- not querying with the member the fact that the receiving scheme's sponsoring employer was a dormant company registered at an address far from that of the scheme member. This was particularly significant given that the Authority knew that the member was still employed as a policeman in Northumberland, and that there were only limited circumstances in which a serving police officer would be allowed to have a second employment;
- not acquiring a copy of the receiving scheme's trust deed and rules to check that it was indeed an occupational pension scheme able to accept the transfer value. The Ombudsman said that "where there are areas for concern" he would expect these to be obtained.
Transfer values can be a minefield for scheme trustees. This case illustrates that the Ombudsman may hold the transferring scheme liable if a member transfers to an unsuitable scheme and the Ombudsman considers that the transferring scheme trustees should have made more checks. However, if trustees unnecessarily delay a transfer, they risk being held liable if the member misses out on investment returns as a result.
Trustees should ensure that they have robust processes in place for transfers, both in terms of identifying "red flags" that a receiving scheme may be a pensions liberation vehicle, and in terms of ensuring legitimate transfers are dealt with promptly. Ombudsman determinations show that he attaches considerable importance to sending members a copy of the Pensions Regulator's "scorpion" leaflet when transfer information is requested, though he does not regard that alone as sufficient for the transferring trustees to satisfy their duties.
Since the transfer in this case, legislation has introduced a requirement for trustees to satisfy themselves that the member has received "appropriate independent advice" if the member is transferring from a defined benefit to a money purchase arrangement and the value of the benefits exceeds £30,000.