Pensions ruling clarifies eligibility for 'fraud compensation fund'

In a pension liberation arrangement, money representing a saver's pension rights is transferred out of that person's existing pension scheme to a new scheme. The money is then made available wholly or partly as a cash payment back to the saver, either directly or as part of a structured loan arrangement which nominally needs to be repaid.

The FCF is a statutory fund established in 2004 managed by the Pension Protection Fund (PPF) with few applications since its inception. The FCF was not designed with pension liberation scams in mind. Once the PPF started to receive applications for compensation from occupational pension schemes used as vehicles for pension liberation scams, in order to ensure that its decisions and the amount of compensation payable were within the law, it sought guidance from the court through a so-called 'part 8' application. The critical ultimate question it sought an answer to was whether the FCF should be available to compensate large schemes used for pension liberation activity.

The test case before the court involved such a scheme – the Turnberry Wealth Management (TWM) Pension Trust. Pinsent Masons, the law firm behind Out-Law, acted for Dalriada Trustees Limited (Dalriada) in the proceedings. Dalriada is independent trustee of the TWM Pension Trust scheme.

Despite bringing making the application, the PPF had no preference as to its outcome, seeking only to obtain clarity on the legal position. The Secretary of State for Work and Pensions was joined to the proceedings as an interested party.

The technical findings of the court

The judgment sets out the technical requirements for an occupational pension scheme to qualify for compensation under the FCF. However, there were certain anomalies about the types of schemes used for pension liberation activity that meant that some uncertainty existed about whether those requirements could in principle be fulfilled.

Amongst the specific points raised, and the determinations made by the court, were the following:

• A question arose around whether a company purporting to be the employer for the relevant occupational pension scheme could be considered an "employer" for the purposes of section 182 of the 2004 Pensions Act, which sets out the circumstances in which fraud compensation payments can be made. The judge, Mr Justice Trower, determined that such a company could indeed meet that statutory test. He also went further and held that, as is the case with many schemes of a similar nature, it is not necessary for the company to have employees in a conventional sense, and merely the presence of unremunerated directors is sufficient;
• The meaning of the "employer's pension liabilities under the scheme" was also addressed in the ruling. One of the conditions for entitlement to compensation is that a "scheme failure notice" be issued, confirming that the employer has suffered an insolvency event and that no other person has assumed responsibility for meeting the employer's pension liabilities. Many pension liberation schemes do not involve conventional employer pension obligations. The court determined though that a scheme failure notice could be issued whether pension liabilities arose under the scheme, under statute or otherwise, and could be issued even if there were no pension liabilities at all, meaning that there will be no barrier to eligibility on this basis.
• The judgment also addressed the issue of the types of losses in relation to which a claim on the FCF can be made. The judge decided that these could extend potentially to costs incurred by the trustee appointed by The Pensions Regulator to administer a scheme suspected of pension liberation activity, as well as a scheme sanction charge levied against such a scheme – a real possibility with schemes that have allowed payments to be made directly or indirectly to members. Such losses would need to be attributable to the act of dishonesty giving rise to the claim in the first place, and reasonable and proportionate. The PPF will have discretion as to what is reasonable in any individual situation, and not the court;
• The judge also considered whether a scheme amounting to a "sham" could convert into a genuine occupational pension scheme at a later date. He was not persuaded it could, although he did not determine all of the points under consideration. A "sham" itself is tightly defined in English law, so the circumstances in which a sham could actually be established, even in relation to a pension liberation scam, will be rare – and the judge did acknowledge that the question was hypothetical and that Dalriada "may well be right" in saying a sham was "incredibly unlikely" in these circumstances.

The impact of the ruling

The court's clarification on these points means that schemes like the TWM Pension Trust might, in principle, be eligible for compensation from the FCF – subject to some caveats.

There is a significant amount of process to be gone through in order to establish the exact extent to which that scheme, and the many others that will be considering or have already made claims upon the FCF, should be eligible for compensation. 

One of the core criteria, for example, is establishing evidence of actual dishonesty. The claimant scheme also needs to have its employer in an "insolvency event", which realistically means liquidation. However, employers for these types of schemes are often dormant and prone to being struck off the Companies House register when failing to comply with filing obligations.  

A claim on the FCF also needs to be "last resort", meaning the trustees will be expected to have explored other avenues for recovering monies lost by the affected scheme – including scope for pursuing those perpetrating the original dishonest acts or omissions. 

The FCF also relates only to occupational pension schemes, so this judgment will not create any scope for compensating individuals who have transferred to other types of schemes, particularly personal pension schemes, and who have subsequently lost out as a result of scams. Similarly, it will not aid those who have lost out as a result of investment scams after drawing down pension monies and reinvesting them – although victims of such scams might have means of seeking compensation through the separate Financial Services Compensation Scheme.

Still, with the proliferation of the occupational pension liberation model used in the last decade, this judgment does offer up some hope for members of such schemes, many of whom have lost the vast majority of, if not all of, their pension savings to a scam. This is a stepping stone, albeit a significant one, on the path towards seeing some genuine financial recompense for at least some of the many victims of pension scams.