In recent blog posts, we predicted that the year ahead would see an increase in group workforce litigation. The most obvious topics that spring to mind are employment law issues such as workers’ rights post-Brexit, Covid-19 related claims (including the impact of large-scale layoffs and redundancies and the return to the office post-pandemic), employee data privacy claims and equal pay claims. But what about pensions? This blog examines the extent to which defined benefit (DB) pension transfers may prove fertile territory for class actions in the months and years to come.
Major changes to the pensions tax legislation in 2015 (the so-called “pensions freedoms”) have made it more attractive for members of DB pension schemes to cash in their DB pensions by exchanging them for defined contribution (DC) benefits. Doing so allows members to take their benefits in a number of flexible ways, including taking their entire pension in the form of one or more cash lump sums. This trend has raised concerns that individuals will be left with a lower retirement income, and risk running out of money in old age. It is the regulators’ view that it is not in the majority of members’ interests to transfer out of their DB pension.
We have blogged previously about the increased regulatory scrutiny surrounding DB transfers. The latest FCA regulatory initiatives confirmed that detailed scrutiny and enforcement work aimed at redressing previously unsuitable DB transfer advice will continue until at least Spring 2022. Going one step further, the Pensions Schemes Act 2021 aims to protect members from scams by imposing a requirement for certain conditions to be met before a member can transfer their pension benefits to another scheme, and the Department for Work and Pensions has published a consultation on these proposals. The Pensions Scams Industry Group also recently published a new version of its code of practice. It seems to us that the noise in this area is getting louder.
Members have several potential routes to remedy. We have already seen a number of complaints to the Financial Ombudsman Service and the Financial Services Compensation Scheme. Members might also wish to bring claims against the financial advisers for professional negligence. A high-profile example of this might be the British Steel Pension Scheme. During a restructuring, a significant number of members with DB pensions chose to transfer to a DC scheme following financial advice. Clarke Willmott is representing many of those workers in compensation claims. The law firm claims that its clients have suffered losses ranging from £30,000 to over £1m, and as a result it is “fighting hard to see that those individuals secure the maximum compensation possible by exploring all avenues, including court proceedings where appropriate”.
But financial advisers aren’t the only ones on the hook. Employers and pension scheme trustees might also be attractive defendants due to their deep pockets. If the DB transfer was an employer-led exercise, individuals could look to bring a claim against the employer directly. Breach of duty of good faith is a potential liability hook, although claims against employers will likely be much more difficult to pursue than those against financial advisers. These coordinated exercises are typically implemented with the cooperation of the pension scheme trustee, so they could also be a target.
Even if there are only a few low value complaints to date, or even if there are none, it would nonetheless be prudent for financial advisers, employers and pension scheme trustees to put in place a strategy for dealing with this issue going forwards. This is an area fraught with risk and it is perhaps only a matter of time before a wave of class action lawsuits are filed against the industry.