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Freshfields Risk & Compliance

| 2 minutes read

Pensions transfer advice – increased risks for trustees and administrators?

The activities of firms advising pension scheme members on whether or not to transfer their DB benefits to a DC scheme have faced increasing regulatory scrutiny during 2020. We have previously commented on the “DB to DC transfer risks” facing such firms (see our earlier blog posts here, here and here on the issue). However, a recent decision from the Pensions Ombudsman (the PO) has further complicated the pensions transfer market by highlighting the increased risks facing trustees and administrators in the context of pensions transfers.

The recent PO decision (Mr T v James Hay Partnership – CAS-38354) demonstrates that trustees and administrators could be required to pay compensation to members who have suffered investment losses due to a delay in processing a transfer request, even where the transfer has been made before the statutory deadline. Below is a brief summary of the facts of this decision.

Mr T requested the transfer of his funds from a small self-administered pension scheme (SSAS) (administered by James Hay) to a new self-invested personal scheme (SIPP) in March 2016, having received notice that his current pensions trader account would be closing. Mr T intended to invest in the FTSE 100 index to take advantage of the anticipated fall in the index if the UK voted to leave the EU. He then planned to sell once the index had recovered thereby making a profit on his investment. Despite repeatedly chasing James Hay and drawing its attention to the importance of the referendum and his proposed investment strategy, the funds were not transferred to his SIPP prior to the Brexit vote. Rather, the cash element of Mr T’s investment was only transferred on 11 July 2016, with the final line of stock being transferred on 3 October 2016. By the time Mr T received his funds in his SIPP, the index had recovered, and he had lost the opportunity to invest as planned.

Initially, the compensation awarded to Mr T by the PO was limited to £2,000 for distress and inconvenience. This figure did not include any investment loss. The PO held that there was no foreseeability of the claimed losses as Mr T had not specified which shares he had planned to purchase and whether he would have been able to purchase such shares in the desired amounts. Mr T appealed the PO’s initial determination to the High Court. The High Court upheld the appeal and remitted the case back to the PO. In its second determination, the PO took the view that, on the balance of probabilities, Mr T would have invested the full fund amount of his cash funds in the FTSE 100 had he received the transfer into his SIPP prior to the Brexit referendum. Therefore, taking into account the gains in the FTSE 100 during the relevant period, James Hay was ordered to make an additional payment to Mr T of £43,700, together with interest at 8% per annum from August 2016 through to the date of payment.

Given the administrative difficulties caused by COVID-19, a rise in the number of transfer requests, and the need to be vigilant due to the frequency of pension scams, many schemes are likely to take longer to process transfer requests or switch investments in DC schemes. In addition, further market fluctuations are expected in light of the upcoming US election and the end of the Brexit transition period. In this context, it is important that trustees and administrators take appropriate action to ensure that they have robust processes in place to manage any delays to pensions transfers and that they communicate with members to understand whether there are any specific time-frames relating to their request. If they don’t, they may be at risk of paying compensation for any resulting investment losses.


europe, pensions