A recent Pension Ombudsman determination (“Mr Y”) has highlighted the importance of upholding members’ statutory transfer rights when dealing with transfers and in reaching a conclusion after carrying out due diligence. The full text can be accessed here.

Mr Y

This determination centres on a trustee’s failure to decide whether a receiving scheme was a Qualifying Recognised Overseas Pension Scheme (“QROPS”), rather than a ROPS, for the purposes of a transfer out. Specifically, the trustee declined the member’s request to transfer to a scheme in Jersey on the basis that inclusion on HMRC’s ROPS list did not guarantee QROPS status. Transferring overseas to a non-QROPS has serious tax and other consequences.

The Ombudsman held this amounted to maladministration, and that the absence of certainty from HMRC could not be used to “negate the member’s right to transfer under overriding legislation”. He ordered the trustee to come to a decision on whether or not the receiving scheme was a QROPS.

Considerations for trustees

The Ombudsman ordered that – if the trustee decided that the receiving scheme is a QROPS – it should compensate for: any interest above the value of the member’s later transfer into another UK scheme, costs incurred as a result of the delayed decision, and investment losses. On the other hand, if it decided that the scheme is not a QROPS, the member would still have the opportunity to contest this. Therefore this determination shows that undue hesitation in relation to transfers can, in fact, have prolonged practical consequences in terms of cost and time.

Many trustees, like those in the Mr Y case, may be inclined to err on the side of caution when dealing with transfers out. It is certainly still important to carry out an appropriate level of due diligence on transfers (and the industry code of practice has been very recently updated on what this requires). This determination is a reminder that this should be balanced against any overriding statutory rights and that due diligence should result in a decision as to whether the receiving scheme is a permitted recipient of a transfer value.

Understandably, some may feel that this puts them in a difficult position. However, an important distinction to make is that, in relation to Mr Y, the Ombudsman did not find against the trustee for its level of due diligence (which did not amount to maladministration). Rather, it found maladministration primarily on the grounds of the trustee’s refusal to transfer to the Jersey scheme on the basis that it could not satisfy itself that there would not be any “HMRC consequences”.  While the Ombudsman accepted that these factors added a greater degree of uncertainty to the Trustee’s deliberations, they could not be used to negate the member’s right to transfer under overriding legislation.

Finally, it is worth noting that regulations to be introduced under the Pension Schemes Act 2021 are expected to go some way to limiting the exercise of transfer rights, albeit specifically with a view to combatting pension scams. However, this Ombudsman determination serves as a reminder that – outside the context of scams – statutory transfer rights will override any surrounding uncertainties about a transfer.

By Zhuan Faraj and Susannah Young