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Tackling pension liberation fraud

The fight against pension liberation is gathering momentum, with two welcome recent developments. Firstly, HMRC has introduced two new measures to deter pension liberation fraud and to aid scheme administrators in deciding whether to make transfers of member benefits to a registered pension scheme. Secondly, the High Court has ruled that certain suspected liberation pension schemes are occupational schemes, which means that they fall within the Pensions Regulator's powers to appoint new trustees to the scheme, impose financial penalties and freeze and repatriate scheme monies.

What is fraudulent pension liberation?

Pension liberation is when benefits are transferred to a pension scheme which has been set up to enable a member to access benefits before age 55 and/or receive more than 25% of their benefits as a lump sum.

This type of arrangement can lead to significant tax charges and the member having to pay commission or arrangement fees to the organisers of the liberation vehicle. In addition, a member's remaining pension pot may be transferred into unsuitable and high risk offshore investments, which may not provide adequate benefits on retirement.

It becomes liberation fraud when these consequences are not properly communicated to the members.

What are trustees' obligations to transfer benefits?

Trustees need to be aware that they are under a duty to carry out a member's transfer request when the legal requirements are met and must do so within six months from the date of the cash equivalent transfer value guarantee date.

What is being done about pension liberation fraud? 

Encouraging member and trustee vigilance

In February a multi-agency campaign was launched to raise awareness amongst pension professionals and consumers. Guidance has been produced by various pensions organisations working together on "Project Bloom". Trustees and administrators have been warned to pay attention to members attempting to access their pension before age 55, often through a transfer into an unregistered or newly registered receiving scheme. Trustees and administrators are also encouraged to watch out for members who push for quick transfers along with members who have been approached unsolicited and/or have been enticed by the promise of a legal loophole allowing them to access their pensions early.

Deterring pension liberation

Effective 21 October 2013 HMRC will be conducting a "detailed risk assessment activity" before making a decision on whether or not to register a pension scheme. Schemes will no longer be automatically registered with HMRC following submission of the online registration form. The scheme will not be registered until HMRC reviews the application and confirms the date of their decision.

HMRC have also altered the process for confirming whether a scheme is registered to help administrators decide whether to make a transfer. In future, HMRC will respond to requests for confirmation that a scheme is registered without seeking consent from the receiving scheme. HMRC will only provide confirmation if the receiving scheme is registered and the information held by HMRC does not indicate a significant risk that the scheme is being used to facilitate pension liberation.

The Pensions Regulator's powers

The Regulator also has powers to ensure that members are protected from pension liberation fraud. These powers include:

• suspending and/or prohibiting trustees;

• appointing new trustees to schemes;

• issuing financial penalties; and

• freezing and repatriating pension scheme monies.

The Regulator has recently shown it is willing to use these powers. In May 2013, a number of raids were carried out on organisations suspected of being involved in pension liberation fraud. The Regulator subsequently suspended the trustees and appointed independent trustees to administer the schemes. Following this, the High Court was asked to rule on the legal status of these schemes as either occupational pension schemes or personal pension schemes (see below for a summary of the Dalriada case). Only if the schemes were classed as occupational pension schemes would the Regulator have the powers outlined above.

The Dalriada judgment

A case brought in the High Court by Dalriada Trustees Ltd v Nidd Vale Trustees Ltd and others and PI Consulting (Trustee Services) Ltd v TPR and others [2013], dealt with two claims by the independent trustees appointed by the Regulator to the schemes suspected of being liberation schemes (Dalriada and Pi). Both Dalriada and Pi sought a declaration that the schemes to which they were appointed were occupational pension schemes within the meaning of section 1 Pension Schemes Act 1993 (PSA 1993). It was agreed that it would be assumed that the schemes were genuine rather than shams. It has been left open to the Pensions Regulator to contend at a later date, if so advised, that these schemes are a sham.

Mr Justice Morgan concluded that all of the suspected schemes were occupational pension schemes within section 1 PSA 1993. Consequently, the Regulator was acting within its powers when appointing the independent trustees.

How have the developments affected how trustees and administrators should act?

In light of the new guidance, trustees and administrators should:

• remain vigilant to pension liberation fraud warning signs;

• understand that a registered scheme is not a recommendation of that scheme by HMRC;

• be extra careful when dealing with unregistered schemes;

• follow the Regulator's due diligence guidance when processing transfer requests;

• include the Regulator's "Scorpion" information leaflet when issuing transfer packs to pension scheme members;

• report any suspected pension liberation schemes to the Regulator and Action Fraud; and

• take appropriate legal advice where necessary.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2013. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.

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