Pension Liberation
Overview
Members now have much greater flexibility to access their defined contribution pensions following recent reforms to the pension tax system.
As a result, there is now a greater risk that members may make an inappropriate transfer of their benefits out of a defined benefit plan and into a defined contribution scheme.
Member risks
Some members may be attracted by the offer of high returns under the transferee pension scheme, but this may mean that investments carry a much higher risk.
Other members may be attracted by the prospect of accessing pension savings before normal minimum pension age.
However, unless the HMRC tax conditions for making such ill-health pensions are met, such payments are likely to be unauthorised payments resulting in penal tax charges.
High transfer fees and other charges may also erode members' savings.
Issues for trustees
Pension liberation cases raise difficult issues for trustees.
If the payment is unauthorised, it is likely to trigger tax charges for the scheme and the member and there is the risk of a future complaint.
However, if a member has a statutory right to transfer and the receiving scheme meets all the requirements but trustees block the transfer, there is also a risk of member complaints if the transfer does not proceed.
The right to transfer
A member has a statutory right to take a cash equivalent transfer value (CETV) to another pension scheme if the member is no longer accruing rights to that particular category of benefits and meets certain other statutory conditions.
If the member does not meet these conditions, then any right to a transfer depends on the Scheme Rules which may give the trustees discretion about whether to consent to the transfer.
Assessing pension liberation risk
Trustees should check that the receiving scheme is a registered pension scheme or a qualifying recognised overseas pension scheme (QROPS) so that the transfer will be a recognised transfer and not an unauthorised payment.
Sometimes a member may request a transfer to an occupational pension scheme where he or she is not employed by, and receiving earnings from, a participating employer in that scheme and this is a risk indicator for liberation.
Members should be given all relevant information, for example, the Pensions Regulator’s "Scorpion" materials, to alert them to the risk.
Trustees should undertake further checks if initial enquiries reveal that a member has been promised a cash payment for transferring, was introduced to the scheme via cold calling or was offered early access to benefits.
Code of Good Practice
The pensions industry Code of Good Practice on combating pension scams applies to transfers from defined contribution and defined benefit pension plans.
Trustees should be careful to follow the principles in the Code in transfer cases.
The Ombudsman will judge trustee conduct against industry practice at the time of the transfer.
It is also important for trustees to have an audit trail showing that they have operated the correct processes, asked the right questions and considered all the issues.
Member determined to transfer
If trustees are concerned that a member may be the victim of a scam, they should provide suitable risk warnings
However, they may ultimately have to comply with the member’s request where the member has the statutory right to transfer.
Defined benefit schemes
Additional rules and advice requirements apply in relation to transfers of defined benefit rights over a certain amount.
Trustee protection
Trustees could consider requesting a discharge from the member but may not be able to insist on this (for example, where there is a statutory right to transfer).