Ombudsman says schemes should normally have adapted processes within one month of Scorpion leaflet, not three

In his determination in the case of Mr R (PO-24554), the Ombudsman has signalled a change to his approach in relation to complaints involving transfers made shortly after the Pensions Regulator issued its "Scorpion" leaflet in 2013 which set out the steps it expected pension schemes to take to reduce the risk of members transferring to scam arrangements.  The Ombudsman has consistently viewed the issue of the Scorpion leaflet as a watershed moment as regards the level of checks which transferring schemes should be expected to make before paying a transfer value.  However, he has accepted that schemes needed some time to adjust their procedures to take account of the Scorpion leaflet.  In previous determinations, the Ombudsman has regarded three months as a reasonable timeframe, but in this most recent determination the Ombudsman comments that he is not bound by his previous determinations and that, having reviewed the evolving regulatory position and previous determinations, he now considers that a period of one month would be sufficient for a scheme provider to put in place any procedures necessary as a result of the Regulator's new guidance. 

In Mr R's case, the transferring scheme received the transfer value request just days before 14 February 2013, the date the Scorpion leaflet was issued. The transferring scheme attempted to pay the transfer value by the following day.  The matter was complicated by the fact that the initial payment was returned due to an error with the scheme's bank account, and the transfer payment was not actually paid to the receiving scheme until 19 March 2013.  Documentation provided to the transferring scheme showed that the scheme to which the transfer value was being paid had only just been registered with HMRC.  The Scorpion leaflet identified a newly registered receiving scheme as a key warning sign of a possible scam.  The Ombudsman said that in Mr R's case the transfer value had been paid by the day following the issue of the Scorpion leaflet, and that re-sending it due to the issue around the bank account was "essentially an administrative action".  He therefore did not uphold Mr R's complaint.  

Our thoughts

The significance of this determination lies not in the conclusion the Ombudsman reached in the particular case, but in his comment that pension providers should generally have put in place any procedures needed as a result of the Scorpion guidance within one month.  This is a departure from the Ombudsman's previous position of effectively allowing schemes a grace period of three months within which to change their procedures.  The Ombudsman said that he would have expected a pension provider that did not meet the one month timeframe to have considered temporarily suspending transfer values while it made the necessary arrangements, or to have contacted the Regulator to request an extension on the stipulated transfer deadlines.

Ombudsman holds pension provider gave adequate warnings of pension liberation risk

The Ombudsman has rejected a member's complaint that his transferring scheme provider should have engaged verbally with him to warn him of pension liberation risks (Mr R PO-28256).

The member had been persuaded to transfer his pension fund from a personal pension scheme to a newly established small self-administered pension scheme.  The member was appointed as sole trustee of the scheme and sole director of its principal employer.  The member was persuaded to invest most of his fund in hotel accommodation in Cape Verde.  After seeing a BBC Panorama programme featuring investment scams involving properties in Cape Verde, the member became concerned that he had been a victim of a scam.  With the assistance of a claims management firm, he brought a complaint against the provider of the transferring scheme.  In particular, he alleged that the provider should have engaged verbally with him before making the transfer.

When sending the transfer paperwork to the member, the transferring scheme provider had referred to the Pension Regulator's leaflets contained in the original transfer pack.  The covering letter said that the provider had several concerns, specifically: the member might not have received advice from a financial adviser authorised by the FCA, the scheme's trust deed stated that a proportion of the investment might be made outside the UK, and that any overseas investment would not be protected by the Financial Services Compensation Scheme.

In August 2014 the member had signed a form of discharge and declaration supplied by the transferring scheme.  This confirmed that, having read the previous letter which outlined the provider's concerns, the member still wished to proceed and confirmed that he:

• was exercising his statutory right to transfer;
• had read and understood the Regulator's Scorpion leaflet warning;
• discharged the transferring scheme provider from liability on making the transfer payment;
• was aware of the risks and would not hold the provider responsible for any losses or fees, or seek any compensation;
• had received financial advice in relation to the transfer; and 
• acknowledged that in making the transfer payment the provider was not endorsing the suitability of the receiving scheme or any of its investments.

The Ombudsman did not uphold the member's complaint.  He considered it more likely than not that the member would have proceeded with the transfer even if the provider had spoken with him to reiterate warnings about the risks.  He noted that the member had said that he had been convinced the transfer was a good idea because of the investment returns he was expecting to obtain.  The Ombudsman considered that the pension provider had given sufficient warnings to the member and that the member had chosen to disregard them.  The Ombudsman said that the member did have to take some responsibility for his actions.  If he was unclear on the implications of what he was being asked to sign, he ought to have asked sufficient questions to satisfy himself before proceeding.

Our thoughts

The question of the extent to which financially unsophisticated members should be held to the wording of disclaimers in discharge forms has been the subject of numerous (and sometimes conflicting) decisions by the Pensions Ombudsman, the Financial Ombudsman Service and the courts.  This case illustrates the important role which warning letters and discharge forms may play when a scheme is facing a claim from a member who has been the victim of a pension scam.

Ombudsman approach to IFA panels

The Pensions Ombudsman has published a document "Panels and Independent Financial Advisers" setting out his approach where schemes provide their members with a list of independent financial advisers (IFAs).  The Ombudsman notes the FCA's position, which is that schemes should carry out and be able to demonstrate appropriate due diligence and should ensure ongoing monitoring of any IFAs included on a list.

Our thoughts

Providing members with help in their decision-making process can be a legal minefield.  The FCA takes a broad view of what constitutes investment advice requiring FCA authorisation, so trustees need to take care to avoid crossing the line into providing unauthorised investment advice.  Something as apparently innocuous as signposting members to a particular product provider risks crossing the line into advice.  Where pension providers offer members access to products modelling different retirement options, they should make sure that they are not at risk of being held liable if members who use the product go on to make poor decisions.

In addition FCA and Pensions Ombudsman have made clear that if trustees are providing members with contact details for specific IFAs, they expect trustees to carry out some degree of due diligence checks on the IFAs.  On this issue, we would recommend that trustees do not provide lists of IFAs at all, but simply refer members to unbiased.co.uk. 

Ombudsman holds scheme's requests for evidence of entitlement were reasonable

The Pensions Ombudsman has rejected a member's complaint that the NHS Pension Scheme's requests for documentation from her caused a delay in bringing her benefits into payment (CAS-41310-M3X4).  

As the member approached age 65 she applied for payment of her benefits from the Scheme.  The Scheme's administrator asked the member to provide proof of her date of birth in the form of either her birth certificate or her passport.  It also asked for her marriage certificate and her husband's birth certificate, but said that it was prepared to accept certified copies of the latter documents provided they were certified in accordance with the official guidance on certification.  The only document provided by the member with her benefits claim form was a copy of her marriage certificate which had not been certified correctly.  The member subsequently brought a claim under the scheme's internal disputes resolution procedure regarding the fact that her benefits had not been paid to her.  The member subsequently provided a certified copy of her paper driving licence, and her husband e-mailed the scheme's administrators to say that he did not wish to receive any spouse's pension benefits from the scheme, and that the member would be opting to receive a one-off lump sum payment which would extinguish any entitlement to a spouse's pension.

The Scheme eventually agreed, by exception, to accept the certified copy of the member's non-photo driving licence as proof of her date of birth.  Her pension was put into payment and full arrears paid.  The member opted to receive a pension rather than a one-off lump sum.

The Pensions Ombudsman rejected the member's complaint.  He agreed with the Adjudicator's opinion that the evidence the Scheme had requested was reasonable and was not inconsistent with the rest of the pensions industry.  The Ombudsman acknowledged that the member was concerned about sending her passport in the post, but noted that HM Passport Office regularly uses Royal Mail to issue new passports to individuals, and that more secure options such as recorded delivery were available.  The member had chosen to receive a pension and a spouse's pension would be payable on her death.  It had therefore been reasonable for the Scheme to request evidence of the member's marriage and husband's date of birth at the point of bringing the member's pension into payment.

Our thoughts

The outcome of this Ombudsman determination is unsurprising, but it is a useful determination for Trustees and scheme administrators to be aware of in case members query requests for documentation evidencing identity and/or date of birth.  The Ombudsman might have been more sympathetic to a member who did not have the documents that the Scheme was requesting.  In this case it appears that the member did have a passport, but was reluctant let it out of her possession.

Ombudsman orders compensation of over £25,000 for administrator's delay in confirming no court orders re member's fund

In the case of Mr G (PO-21110), the Pensions Ombudsman has upheld a complaint against the administrator and the trustee of a scheme for a delay in providing information requested by a receiving scheme in connection with a transfer value.  In particular, it had taken some time for the transferring scheme administrator to confirm to the receiving scheme that the member's pension fund was not subject to any court orders in connection with divorce or bankruptcy.  

On 26 September 2016, the transferring scheme's then administrator sent the member a transfer information pack showing a cash equivalent transfer value of £1,490,918 which was guaranteed until 26 December 2016.  The member decided to transfer to a SIPP, and the fully completed transfer forms were sent to the transferring scheme's administrator on 30 November 2016.  This was accompanied by a letter detailing information required by the receiving scheme, in particular, "Details of any court orders against the policy, i.e. divorce or bankruptcy".  The member subsequently sent the receiving scheme provider some of the documents contained in the transfer information pack.  These provided some of the information required by the receiving scheme, but did not include confirmation that there were no court orders regarding divorce or bankruptcy in respect of the member's fund.

A new scheme administrator was appointed to the transferring scheme and received details of the transfer request on 9 December 2016.  On 19 December 2016, the receiving scheme's provider informed the transferring scheme's administrator in a telephone call that it required all the information it had asked for in its letter of 30 November 2016.  

The transfer payment was received by the receiving scheme on 6 January 2017.  On 12 January 2017, the receiving scheme provider informed the transferring scheme administrator that it had not received all the information it needed to invest the monies.  On 16 January 2017, the member complained to the transferring scheme administrator about its failure to provide the necessary information which was preventing him from investing the transfer payment.  After several telephone and e-mail reminders from both the member and the receiving scheme provider, the transferring scheme administrator sent a letter to the receiving scheme provider on 23 February which answered all its questions and confirmed there were no court orders against the member's fund.  The receiving scheme provider received this letter on 27 February 2017 and invested the member's transfer payment in accordance with his instructions on 1 March 2017.

The member subsequently brought an Ombudsman complaint against the transferring scheme trustee, the transferring scheme administrator and the receiving scheme, claiming compensation of over £25,000 for loss of investment return, based on a comparison between the position had his fund been invested in accordance with this instructions on 10 January 2017 and what actually happened.  The member calculated that he had missed out on approximately £20,000 in investment returns.  The member benefited from fixed protection against the lifetime allowance charge.  Under the fixed protection rules, if the member made any further contributions to his pension scheme, he would lose the benefit of fixed protection.  Therefore the member calculated that even if he were paid £20,000 in compensation, he would lose out on the tax free growth on that amount for the next 25 years which he would have enjoyed had the £20,000 been held within the scheme.  He therefore claimed an additional £5000 to reflect this.

The Ombudsman did not uphold the complaint against the provider of the receiving scheme.  Key to the Ombudsman's decision was that the receiving scheme's terms and conditions said, "We will require satisfactory transfer information from the transferring scheme administrator before investments can take place."  The Ombudsman held that the receiving scheme was entitled to rely on this condition.

The Ombudsman did uphold the complaint against the transferring scheme administrators and trustee.  He said that the scheme administrator ought to have complied with any reasonable request from the receiving scheme to allow it to complete the transfer and investment process for the member in a timely fashion.  He rejected the argument that the absence of any mention of court orders should have been treated as confirmation that there were none.  If the transferring scheme administrator considered that all necessary information had already been provided, it should have informed the receiving scheme provider of this as soon as possible.

The Ombudsman found the member's calculation of his losses to be credible and ordered the transferring scheme administrator to pay the member £25,522 in compensation.  The Ombudsman also ordered the transferring scheme trustee to pay the member £500 for distress and inconvenience.

Our thoughts

This determination illustrates that when schemes are dealing with transfer value requests, the Ombudsman will expect them to respond promptly to reasonable requests for information even where there is no specific legal duty requiring them to do so and where the transfer value has already been paid.  It appears that the issue in this case arose partly because both the transferring scheme and the receiving scheme had their own standard form transfer documentation which they regarded as "industry standard" and struggled to process information which did not conform to their own standard format.  It therefore appears to have taken some time to identify that the only information that the receiving scheme was missing was an express confirmation from the receiving scheme that the member's fund was not subject to a court order.

This case also illustrates the potential for even a relatively short delay in processing a transfer value to lead to substantial losses for the member, particularly where the transfer value involved is large.  

Trustee wrong to refuse to progress transfer without deciding whether scheme was QROPS

The Ombudsman has upheld a complaint where the Trustee refused to action a member's request to take a transfer value to a Jersey-based scheme because the Trustee could not reach a decision on whether or not the Jersey scheme met the definition of a "qualifying recognised overseas pension scheme" (QROPS) (Mr Y PO-24361).

The member's request to take his statutory cash equivalent transfer value (CETV) to a pension scheme in Jersey gave rise to a considerable amount of correspondence, with the transferring scheme trustee seeking various information in order to satisfy itself that the scheme was a QROPS. 

Several months after the member's transfer request, the Trustee said it would not be approving the transfer because its due diligence had "not been conclusive in the context of HMRC rules" and the risk of the scheme being sanctioned if it made the transfer meant that it could not be approved.  Its e-mail said, "The Trustee considers that the further due diligence required would be disproportionate in time and cost given the position on HMRC rules will not be altered by such an exercise. The Trustee is prepared to reconsider this matter if [the member] wishes to bear the cost of further due diligence including the fees of the Trustee’s legal adviser.”

The member was only able to transfer his pension fund to the Jersey scheme by transferring his fund to a different UK registered pension scheme which was willing to make a transfer to the Jersey scheme.

The Ombudsman held that it was maladministration for the Trustee to refuse the member's transfer request for the reason given by the Trustee.  He accepted that HMRC's refusal to guarantee that it would regard a scheme as a QROPS, and the resulting tax risk from HMRC's position, added "a greater degree of uncertainty to the Trustee's deliberations".  However, he said the Trustee could not use this to negate the member's right to a transfer value under overriding legislation.  He said that the Trustee should not have suggested carrying out further due diligence at the member's expense, particularly when it had said that further information would not have clarified the HMRC position which was its main reason for declining the request.

The Ombudsman ordered the Trustee to:

• pay the member £1,000 for distress and inconvenience;
• decide within 28 days whether the Jersey scheme was a QROPS (ignoring the possibility of HMRC withdrawing QROPS status in future) and, in the event that it concluded the scheme was not a QROPS, set out the basis for its conclusion (with the member having the opportunity to make another Ombudsman complaint if dissatisfied with the Trustee's response);
• if the Trustee concluded that the Jersey scheme was a QROPS, compensate the member for losses suffered as a result of its failure to pay the transfer value as requested.  (The determination sets out in detail the basis on which such compensation should be calculated.)

Our thoughts

Trustees faced with a request to pay a statutory CETV to a purported QROPS can be in a difficult position, as HMRC makes clear that inclusion of a scheme on its "ROPS" list is no guarantee that the scheme is a QROPS, and there are penal tax consequences for making a transfer to an overseas scheme that is not a QROPS.  Nevertheless, this determination makes clear that if the member has a statutory right to a transfer value, trustees must reach a conclusion as to whether the proposed receiving scheme is a QROPS and must not require the member to pay for the due diligence needed to reach their conclusion.

Scheme entitled not to treat member's e-mail received after death as expression of wish

The Pensions Ombudsman has dismissed a complaint from a deceased member's partner who argued that a lump sum death benefit held on discretionary trusts should have been paid in accordance with the terms of an e-mail from the member to his financial adviser in which the member set out his last wishes six days before his death (PO-40022).  

The scheme was a personal pension scheme.  Its rules provided for lump sum death benefits to be held on discretionary trusts.  The member had never provided the pension provider with an expression of wish form.  Following the member's death, the scheme provider made enquiries from which it established that the member had left a financially interdependent partner and a daughter aged under 18.  The provider's enquiries were largely dealt with by the member's financial adviser (IFA) who provided evidence that the member's mortgage had been transferred into the sole name of the member's partner, and that it was the member's wish for his partner to "have all pension plans to allow her to pay off their mortgage (approx. £67,000)".  The IFA also said that a separate lump sum death in service benefit of £164,000 had been paid to the member's daughter as agreed by all parties.

The pension provider exercised its discretion to split the lump sum (approximately £17,500) equally between the member's partner and daughter.  The member's partner complained that the death benefit should have been solely awarded to her, that the member's daughter had been substantially provided for by the death in service lump sum, and that the member's wish had been for his partner to be the sole beneficiary of the pension scheme.  The IFA provided a copy of an e-mail from the member to the IFA sent six days before the member's death in which the member set out his last wishes.  The e-mail said, "Pension will pay off mortgage".

The pension provider rejected the complaint on the grounds that the decision as to who benefited from the death benefit was discretionary and that it had considered that a fair decision was to divide the monies equally between the partner and the daughter.  It did not treat the member's letter to the IFA as an expression of wish form under the scheme.

The member's partner complained to the Pensions Ombudsman, but the Ombudsman rejected the complaint.  He found that the provider had taken account of all potential beneficiaries and had considered how the lump sum should be distributed in accordance with the scheme rules.  He was satisfied that the provider had acted within its discretion to make the decision it did.  He noted that the provider had not had sight of the member's e-mail prior to his death and that, in the circumstances, the provider had not acted unreasonably in not basing its decision on the information in the e-mail.

Our thoughts

This case illustrates the problems that can arise where members discuss their wishes regarding lump sum death benefits with others, but do not inform the scheme trustees.  Encouraging members to complete expression of wish forms and review them regularly may help to avoid such issues.  In this case the pension provider was able to show that it had made detailed enquiries and made a decision which was reasonably open to it based on that information.  This was key in defending itself against the complaint.

SASS administrator not liable for incorrect tax information about drawdown

In the case of Mrs T (CAS-45393-C2H6), the Ombudsman has held that the scheme administrator of a SSAS was not liable for agreeing in a telephone call with a scheme member's incorrect assumption that a large drawdown payment would be taxed at the rate of 20% where the true position was that it would be taxed at the member's marginal income tax rate of 45%.

Mrs T and her husband were both members and trustees of a SSAS.  Mrs T elected to move from capped drawdown to flexi-access drawdown.  The scheme administrator repeatedly advised the member to take advice from an IFA and/or guidance from Pension Wise.  The member completed a risk awareness questionnaire and ticked "Yes" to a question asking whether she was aware of the tax implications of taking money from her pension savings.  

The "Additional Notes" section to the benefit option forms completed by the member said that all income would be subject to taxation at the member's marginal rate.

After submitting the benefit options forms, the member's husband, Mr T, asked the scheme administrator in a telephone call when the payment would be made and why it would be subject to tax.  The scheme administrator replied that income payments from the scheme were liable to income tax which would be collected via the PAYE system.  When Mr T asked whether the tax rate applicable to the payment was 20%, the scheme administrator replied that this assumption was correct, and it might also be possible to reclaim any overpaid tax directly from HMRC.

When an income drawdown payment of almost £670,000 was made to Mrs T, she was shocked to discover that income tax had been deducted from it at the rate of 45%.  She complained to the Ombudsman saying that she would have made "a different encashment decision" if the scheme administrator had told her that tax at her marginal rate would be deducted from the income payment.

Although the Ombudsman held that it had been maladministration for the administrator to agree in a telephone call with Mr T's assumption that the applicable tax rate was 40%, the Ombudsman did not order the member to pay any compensation.  He said that Mrs T should already have been aware before the telephone call that the income payment would be subject to taxation at her marginal rate.  Key factors in the Ombudsman's decision were:

• Mrs T was a trustee of the SSAS.  As such she had an obligation to act as a prudent person would and to take advice on any matters she did not understand;
• Mrs T had not produced any evidence to support her assertion that she would have made a different encashment decision had she understood the tax position;
• the notes to the benefit options form had stated that all payments under flexi-access drawdown would be taxed at the member's marginal rate;
• Mrs T's response on the completed forms had confirmed that she was aware of the tax implications of taking money from her pension savings;
• any non-financial injustice suffered was not sufficient to warrant the minimum award of £500.

Our thoughts

Given the members' insistence that they had no need of advice in relation to a substantial cash withdrawal from the scheme, it is difficult not to feel sympathy for the scheme administrator in this case.  We think the two key points from this determination for scheme providers are:

• the importance of being able to demonstrate that members have been advised to take advice or guidance before taking benefits, and that members have been specifically warned that benefits may be subject to tax;
• the importance of ensuring that staff have sufficient training to avoid inadvertently providing incorrect information about the tax consequences of taking benefits.

SIPP administrator not responsible for failure to warn member about LTA charge

The Ombudsman has dismissed a complaint by a member who alleged that the administrator of his SIPP should have warned him that he would incur a lifetime allowance (LTA) charge on a benefit crystallisation event (BCE) occurring on his 75th birthday in relation to his SIPP (Mr N PO-28826).

Separately from the SIPP, the member had an annuity.  This was legally classed as a "pre-commencement pension" which required the member's available LTA to be adjusted downwards at the member's first BCE.  The SIPP administrator had been informed of the annuity.  Subsequent benefit certificates provided by the administrator took into account the position of the SIPP only and therefore did not reflect the impact of the annuity on the member's available LTA.

The scheme administrator's terms and conditions said, "We provide the services on a non-advised basis.  Neither we nor our associates give, nor is anything on the website or any linked website to be construed as financial, investment or tax advice of any kind."  The SIPP's KFD included the heading "Can you give me advice?" followed by the answer, "No, we are not authorised to provide any advice on tax or financial services related matters".

The Ombudsman held that the scheme administrator was not responsible for monitoring the member's tax position.  He acknowledged that the member could possibly have mitigated the LTA charge, for example by taking more of his fund as a tax free lump sum, but the fact that the member did not do so was his decision alone.

Ombudsman awards member £1400 for distress and inconvenience where pension paid almost two years late

The Ombudsman has awarded a member £1400 for distress and inconvenience where the insurance company administering the scheme did not start to pay the pension until almost two years after the member originally became entitled to it (Mr L PO-25364).

The member was due to receive his scheme pension from his 65th birthday in July 2017.  In January 2017 he contacted the scheme administrator.  The administrator advised him that it held no records of his pension and that it would not communicate directly with him.  It provided the member with contact details of the person who it believed to be the scheme's trustee, though unbeknownst to the administrator, the trustee had been replaced by a professional trustee following the employer's receivership.  The member contacted the old trustee early in 2017.  On 2 April 2017 the old trustee wrote to the administrator requesting it to send the member a retirement pack.  The administrator did not issue the retirement pack until August 2017.  On 24 August 2017 the member and old trustee completed and returned the documentation enclosed with the retirement pack.

In October 2017 the administrator advised the old trustee that it held no deed of appointment, meaning that it could not put the member's pension into payment.  Throughout 2018 there was ongoing correspondence on this issue, which was finally resolved in December 2018.  However, further delays then ensued due to the administrator's failure to calculate the pension on a backdated basis as requested by the member, and subsequently due to the administrator requesting a new signed declaration from the member in order to put the pension into payment.  The pension was eventually brought into payment in early 2019, though this gave rise to some further correspondence due to the administrator failing to explain how the payments had been calculated.

At the point when the Ombudsman came to determine the member's complaint, the Ombudsman was satisfied that the member had been paid the pension due to him with interest.  However, he awarded the member £1400 for the severe distress and inconvenience caused by the scheme administrator's maladministration "and lack of an apology".

Our thoughts

This determination illustrates that if there is a significant delay in bringing benefits into payment, the Ombudsman may make a substantial award for disappointment and distress even if benefits have been paid in full and with interest by the time he determines the complaint.