A shock high court ruling has made it harder than ever to protect pension fund members from scams
Providers’ ability to protect members from pensions liberation has been severely crippled by a new high court ruling.
The case, Hughes v Royal London, centres on a pension transfer request made in 2014 to a new scheme.
The dispute arose after Royal London refused the request because it was concerned about the status of the scheme and Ms Hughes’ right to transfer her pension into it.
Ms Hughes contested the decision by complaining to the Pensions Ombudsman who found in favour of Royal London.
This decision has now been successfully appealed in the High Court.
Few in the industry were expecting the decision to be overturned and legal experts have raised concerns that this ruling could make it easier for potential scammers to take advantage of retirees.
The consequences of this ruling are far reaching and could leave pension scheme members more exposed to the risk of scams”
Before the ruling it was common for a pensions provider to request proof of an earnings relationship between the individual and the provider for the potential new scheme.
As most dubious schemes can’t satisfy this criteria it gave legitimate providers grounds to refuse transfers where they had reservations about individuals opening themselves up to potential scams.
This judgment removes that obstacle, leaving pension holders vulnerable.
For trustees who are already concerned about protecting members, this ruling is yet another nail in the coffin.
Lead legal advisor to Royal London, pensions litigation partner at Pinsent Masons, Ben Fairhead, said: “The consequences of this ruling are far reaching and could leave pension scheme members more exposed to the risk of scams.
This decision lays bare the problems facing pensions providers and trustees grappling with the rise of such scams”
”It will now be far easier for individuals to move their money from legitimate schemes, ultimately leading to a potential influx of monies into suspicious schemes as the hands of those being asked to make transfers are increasingly tied by the inflexibility of the law.
“This decision lays bare the problems facing pensions providers and trustees grappling with the rise of such scams. They are effectively tasked by the Pensions Regulator and the FCA with trying to prevent pension funds disappearing into scams. Yet they will be increasingly hamstrung without a legitimate legal basis for declining to make the transfers that ultimately enable the scams to take place.
“In many ways this decision simplifies the law for pensions providers who have been struggling with burdensome processes to decide whether to facilitate transfers where there are scam concerns. However, it also creates a great deal of uncertainty in the battle against pension scams.
All the pensions industry can do for the moment is continue to warn the public”
“Barring a change to the law – which would be far from straightforward - or more decisive action being taken by government agencies to clamp down on suspicious schemes and the perpetrators, all the pensions industry can do for the moment is continue to warn the public.
“Inevitably, in the meantime, scope very much remains for unscrupulous individuals to target and exploit those desperate for cash or enticed by the prospect of implausibly high returns on investments.”
A spokesperson for Royal London said: “Pensions Liberation and pensions fraud raise serious concerns for providers like Royal London. We therefore take transfer requests very seriously and look out for the warning signs highlighted by the Regulators and relevant guidance.
”In spite of what we might find, if a customer has a statutory right to a transfer then there is very little we can do if the customer wants to proceed. The transfer must be allowed.
”This will open the floodgate for fraudsters hell-bent on exploiting flaws in the system”
“This judgement provides greater clarity on the circumstances which determine when that statutory right exists and we will obviously comply with the Court Order relating to Ms Hughes’ transfer.”
Ian Bell, Head of Pensions at RSM agreed that the decision is catastrophic for trustees. He said: ”We recently published research which found that the proportion of schemes reporting experience of fraud had doubled in two years, rising from 17 per cent in 2013 to 37 per cent in 2015. Over half of respondents said they had identified requests for member transactions they suspected of being scams.
“Against this backdrop, trustees, assisted by the Pensions Regulator, have been making real progress in terms of trying to identify suspect schemes and stop people losing their lifesavings to scammers.
“This judgment is a real setback for schemes which are trying to do the right thing. The inflexibility of the law will mean that this will now be much harder, and there is a danger that this will open the floodgate for fraudsters hell-bent on exploiting flaws in the system for their own ends.”