Ombudsman upholds transfer complaint where receiving scheme turned out to be scam

The Pensions Ombudsman has ordered Hampshire County Council to reinstate a member in the Local Government Pension Scheme (LGPS) following a complaint from a member who took a transfer value to an arrangement which turned out to be a scam (Mrs H PO-21489).  

The Council, as the body responsible for administering the scheme, had concluded that it was under a legal obligation to make the transfer.  However, the Ombudsman held that it was under no such obligation in the member's case.  The Ombudsman noted that the statutory right to take a cash equivalent transfer value from one occupational pension scheme to another applied where a member was acquiring transfer credits in the receiving scheme.  Transfer credits were defined in the legislation as rights allowed to an "earner".  Following the court's decision in the case of Hughes v Royal London, the earnings did not need to come from the receiving scheme's employer.  The Ombudsman said that in the Hughes case, the judge and parties had proceeded on the basis that in order to obtain transfer credits, a member had to be a current earner from an employer of some sort. He concluded that Mrs H was not an "earner", as at the time the transfer was made, she was not in employment and was living off state benefits.  The Ombudsman acknowledged that a future case might provide clarity on this issue, but said, "… at this time, Mrs H's statutory right to a transfer had not been made out."

The consequence of the conclusion that Mrs H did not have a right to transfer was that the scheme had a discretion to make the transfer.  The Ombudsman concluded that had the Council realised that it had a discretion whether or not to make the transfer, it was likely that it would have noticed several "red flags".  Mrs H was approaching her normal retirement age, but the employer was a steel stockholding company based several hundred miles from Mrs H's home. Another red flag was that the receiving scheme was recently established.  The Ombudsman held that in that situation, "one would have expected the Council to make an attempt, by phone or email, to explain its concerns to Mrs H and to point out the possibility that the Scheme should be a scam."

Our thoughts

Schemes making transfers on the basis that they are legally obliged to do so notwithstanding the presence of potential scam "red flags" should take note of the Ombudsman's decision that a person not currently in receipt of earnings is not an "earner" for the purposes of having a statutory right to a cash equivalent transfer value.  Since the transfer in this case, the law has been changed to require transferring schemes to satisfy themselves that a member has taken "appropriate independent advice" before taking a transfer of more than £30,000 from a defined benefit to a money purchase scheme.  However, even had this requirement been in force at the time, it would not have applied in this case as the transfer value was £26,234.

No requirement on scheme to warn member about loss of lifetime allowance protection

The Pensions Ombudsman has rejected a complaint by a member who complained that neither his scheme nor employer warned him about the risk of loss of his protection against the lifetime allowance ("fixed protection 2012") as a result of being auto-enrolled into a scheme (Mr T PO-23961).  

The member had applied for and been granted fixed protection 2012 after accruing a substantial pension entitlement while working for a bank.  The member subsequently took up a role as a visiting lecturer with a university.  The university sent him a letter informing him that he would automatically be enrolled into the Teachers' Pension Scheme and that he had the right to opt out.  The letter provided details of how to opt out.  It was only in a discussion with his financial adviser three years later that the member discovered that his membership of the Teachers' Pension Scheme had resulted in the loss of his fixed protection.  He complained that he had not been warned of the consequences of not opting out of the scheme.

The Ombudsman rejected the complaint in relation to both the employer and Teachers' Pensions (the scheme administrator), saying that neither should routinely be expected to provide scheme members with detailed information about lifetime allowance protection in new member enrolment information and that "a requirement to do so would represent a significant and unwarranted administrative burden".

Ombudsman rejects complaint where SIPP operator levied £800 AMC on SIPP with worthless investment

The Pensions Ombudsman has rejected a complaint by a SIPP member where the SIPP operator levied an annual management charge (AMC) of £800 on the scheme despite its asset being believed to be worthless (Mr T PO-28491).

In 2011, the member signed an application form to open his SIPP.  This said that he understood that the SIPP fees could be changed from time to time.  The member invested in the Harlequin project, a pooled non-standard investment (NSI) which intended to develop holiday rental properties in the Caribbean as part of the larger legal group Harlequin SVG.  In April 2016, the SIPP introduced a new AMC structure for members with NSIs.  In October 2016, Harlequin Property SVG entered insolvency proceedings.  The properties in which the member had intended to invest had not yet been built.  However, the particular Harlequin investment in which the member invested did not enter insolvency.

In December 2017, the member complained to the SIPP operator that it had invoiced him for an AMC of over £800 that year and that he considered this to be excessive.  He said that he had asked many times for the SIPP to be closed.  The SIPP operator responded that unless the member's investment became insolvent, the SIPP had to remain open because the investment was a live asset and some prospect of recovery still existed.  The SIPP could only be closed after it had received official documentation that the Harlequin investment had ceased trading.  It said that the member had been compensated by the FSCS in respect of financial advice received and that one feature of the FSCS compensation agreement was that the member had agreed not to take any action that would compromise the FSCS's ability to reclaim money from Harlequin SVG by closing the SIPP or waiving his rights to the investment.  The operator said that the additional work which it undertook on administering SIPPs with distressed NSIs involved considerable cost.

In 2018, the FSCS provided an update to SIPP owners who invested with Harlequin SVG.  It said that Harlequin investments must stay live and have a notional value to comply with legislation and tax rules.  It also said that SIPP providers reserved the right to charge an AMC for administration.

By the time the complaint came before the Ombudsman, the original SIPP provider had gone into administration and its business had been taken over by another operator.

Although the Ombudsman expressed sympathy with the member's predicament, he did not uphold the member's complaint.  As it was not possible for the SIPP operator to accurately value the investment, it was in accordance with HMRC requirements to value it at £1.  He agreed that the SIPP had to stay open while there might be some prospect of it realising some value.  The terms of the member's compensation agreement prohibited him from taking any action that would compromise the FSCS's ability to recover money from Harlequin SVG in the future.  

The Ombudsman noted that the AMC had increased greatly since the SIPP was opened, but said that at the time the SIPP was opened, it was not foreseeable that the scheme operator would require significant professional advice in order to manage it.  The SIPP application form said that the operator was entitled to increase its AMC subject to providing the member with prior notice.  He noted that in addition to any duties relating to dealing with NSIs, the SIPP operator was still required to provide information to HMRC in relation to the SIPP in order to comply with its duties as scheme administrator.

Our thoughts

It is difficult not to feel sympathy for the member in this case, but the Ombudsman's decision is likely to be welcomed by SIPP operators by confirming that they will not in principle be prevented from levying administration fees simply because the value of a SIPP's assets is found to have fallen to nil or almost nil.

Ombudsman rejects complaint where SIPP provider made minimal transfer checks in 2010

The decision of the Deputy Pensions Ombudsman (DPO) rejecting a complaint in the case of Mr Y (PO-21261) in relation to a pension transfer made in 2010 highlights the lower standards of due diligence to which scheme operators will be held where the transfer occurred before February 2013 when the Pensions Regulator issued its warning about pension scams.

In June 2010 the member transferred his pension fund from a SIPP to a pension scheme which then made a loan to the member, resulting in an unauthorised payment and the member being subject to a substantial tax charge.  The balance of the member's fund, which had been invested in foreign exchange, was also lost.

Prior to making the transfer, the SIPP operator conducted a search of HMRC's online register which showed that Tudor Capital Management Limited (TCM), the company which had requested the transfer on behalf of the member, was the receiving scheme's administrator.  There was no evidence that the SIPP operator had carried out any other due diligence.  The member argued that if the SIPP operator had carried out the most basic of checks, it would have identified that there were some extremely concerning features of the receiving scheme, namely:

• the scheme's employer was a recently incorporated company and there was no evidence of it trading;
• the member was not an employee of the scheme employer;
• the same individual who had acted as a financial adviser to the member and recommended the scheme was also a trustee of the scheme, and the company secretary and sole shareholder of the scheme employer; and
• the Pensions Regulator had published a determination notice dated 15 April 2010 which said that TCM had been suspended from exercising any functions as a trustee of any trust scheme pending consideration of proceedings against it for an offence involving dishonesty or deception.  The directors of TCM were specifically named as being affected by the notice.

The scheme operator argued that it had acted in accordance with industry practice at the time the transfer took place.

The DPO did not uphold the member's complaint, holding that the industry standard at the time the transfer took place was to check that the receiving scheme was registered with HMRC, and did not extend to checking for adviser conflicts.  Moreover, the Adjudicator at the Ombudsman's office had found that the information about TCM's suspension by the Pensions Regulator was not widely available in 2010, as the Pensions Regulator did not publicise its determinations until 2014.

Our thoughts

The DPO's determination highlights that the level of due diligence expected of a scheme administrator before making a transfer will vary greatly depending on when the transfer took place.  The Ombudsman generally regards the Pensions Regulator's warning about pension scams issued in February 2013 as marking a turning point in relation to the level of due diligence to be expected of transferring schemes. 

Ombudsman rejects complaint against provider that made transfer despite potential scam warning

The Pensions Ombudsman has rejected a complaint against a pension provider which processed a transfer to an arrangement which turned out to be a scam in a case where the member had a few weeks earlier contacted the provider and asked it not to make a transfer to a scheme of a different name due to concerns about the receiving scheme being under investigation by the FSA (the predecessor to the FCA) (Mr L PO-22419).  

The member had been visited at home by an individual who persuaded him to sign a blank transfer discharge form.  The Ombudsman found that on 27 October 2011, the member or his father had contacted the provider of the transferring scheme and instructed it not to make any transfer to businesses known Pensions Release or Pensions Online.  The provider noted the instruction on its computer system as, “Do not transfer this policy away to a pension provider in the name of Pensions Release or Pensions Online as they are being investigated by the FSA and the client does not wish to transfer to them anymore, if any problems call the [policyholder] on [ ] or [ ].”

On 2 December 2011, the transferring scheme provider received the letter enclosing the member's signed transfer form and asking for a transfer to be made to a scheme with a name which did not include the names "Pensions Release" or "Pensions Online".  The date next to the member's signature had been amended to 23 October 2011.  The transferring scheme provider processed the transfer.  The receiving scheme arrangement turned out to be a scam.

When the matter came before the Ombudsman, there was a dispute between the parties as to whether the transferring scheme provider had been instructed not to make any transfer or only not to transfer to a provider with the name of Pensions Release or Pensions Online.  The Ombudsman concluded that it was more likely than not that the call referred expressly to Pensions Release/Pensions Online.  As the scheme to which the provider had been asked to make a transfer did not suggest a connection with those schemes, the Ombudsman considered that there were no grounds for suspicion at that time.  He therefore did not uphold the member's complaint.

Our thoughts

The transfer in this case was made in 2011, before the Pensions Regulator had issued its warnings about pension scams.  If the same circumstances were to occur today, the Ombudsman might well take a tougher line.  It would be advisable for trustees/administrators to have processes in place to ensure if a transfer request is received in respect of a member who has already raised concerns about a pension scam, direct contact is made with the member to ensure that the request is genuine.

Complaint not upheld where SIPP administrator unable to show exact fund split calculations produced by software

The Pensions Ombudsman has not upheld a complaint in a case where a SIPP's administrator was unable to show the exact calculations used by its software to produce the fund split between the member's crystallised and uncrystallised funds (Mr E PO-21419).

The member had taken intermittent drawdown income and pension commencement lump sums (PCLS) from his pension fund with the result that his fund was part crystallised.  The member had taken a PCLS and income from his fund in March 2016.  Following this, he raised concerns about the fund split shown by the scheme administrator.  Following investigation, the administrator acknowledged that an error had occurred and that the crystallised element of the fund was overstated by £7000.  Following this, the member made further queries about the fund split calculations.  The scheme administrator responded with a spreadsheet showing its calculations of the fund split as 79.88% uncrystallised and 20.12% crystallised.  There was a slight discrepancy between these figures and the software normally used by the administrator for calculating fund splits, which showed the fund split as 79.86% uncrystallised and 20.14% crystallised.

The scheme administrator explained the discrepancy between the figures was due to the software taking much more data into account in its calculations.  In particular, the software took account of each transaction that occurred and fund growth, and apportioned between the crystallised and uncrystallised funds as appropriate.  The spreadsheet calculation used an estimated overall investment return. The administrator said that the method for calculating fund splits was not prescribed in legislation and varied across the industry.  

The member complained to the Ombudsman that the scheme administrator should be under an absolute obligation to justify its reliance on the software where it produced materially different results to the administrator's internal spreadsheet and the member's own calculations.

The Ombudsman agreed with the principle that it would be reasonable for pension companies to provide their methodology for pension calculations.  However, he noted that the difference between the administrator's spreadsheet calculations and the software calculations was marginal, and that the administrator was unable to explain the difference because it used proprietary software and did not have access to all its internal workings.  As the Ombudsman was not aware of any fixed methodology to determine a fund split, he could not uphold a claim for maladministration.  The Ombudsman agreed that there should be an award of £500 for distress and inconvenience in relation to other issues which the member had experienced with the administration of the scheme including the misreporting of investment values and issues with the calculation of the member's maximum income.

Our thoughts

This case raises the issue of the extent to which members can expect scheme administrators to provide details of the methodology used to calculate the figures they produce.  Although the member's complaint was not upheld in this case, the Ombudsman accepted the principle that it would be reasonable for companies to provide methodology for their pension calculations.  Had there been a bigger discrepancy between the administrator's spreadsheet calculations and the figures produced by the software, it may be that the Ombudsman would have required the administrator to provide a more detailed explanation. 

Pensions Ombudsman reports scheme to FCA due to concerns over inadequate systems

After upholding a member complaint against the administrator of a personal pension scheme, the Pensions Ombudsman has sent a copy of his determination to the FCA (Mr S PO-20414).  

Following a transfer from the personal pension scheme to a SSAS, the member had raised concerns that there was a shortfall in his transfer value due to some of the units in which his funds had been invested having "disappeared".  The member complained to the Ombudsman after the personal pension scheme's administrator had failed to provide a record of the transactions carried out prior to the transfer despite repeated requests.  Following the complaint, the administrator admitted that the transfer value should have been higher and offered to pay £740 in respect of the missing units.

The Ombudsman ordered the administrator to compensate the member in respect of a reduction in the number of units held by the member's pension fund over a five day period immediately before the transfer which the administrator had been unable to explain.  He also ordered the administrator to pay the member £1000 for serious distress and inconvenience.  The Ombudsman acknowledged that it might be the case that the administrator's systems were inadequate and made it difficult or impossible for members to identify any lost units.  However, he said that if that was the case, it was for the scheme's regulator to take any further appropriate action, and that he would be sending a copy of his determination to the FCA.