In my last few articles, I have discussed a number of important rulings from the Financial Ombudsman Service which give valuable pointers to the way in which financial advisers should – or should not – market and transact certain classes of business.
The case studies reflect the way in which the FOS deals with complaints from clients and should be monitored closely by authorised firms, which might consider amending procedures to ensure that they will not be taken to task by this important and powerful organisation.
In this article, I am moving away from mainstream financial services products, as dealt with by the FOS, to look at cases dealt with by the Pensions Ombudsman, the organisation which deals with complaints against employer-sponsored pension arrangements.
It is worth noting first that around half of all cases rejected by the Pensions Ombudsman should have been referred to a different organisation, the Occupational Pensions Advisory Service. Many other complaints were similarly redirected by the Pensions Ombudsman towards the FSA, the FOS, the Pension Schemes Registry or some other organisation.
So, lesson number one for complainants and advisers is to ensure they make their complaint or direct their enquiry to the correct organisation.
What kind of cases are handled by the Pensions Ombudsman? Here are a few of the more important rulings.
One particular case highlighted potential problems with overfunded occupational pensions, especially where there is only one remaining member of a scheme. Mrs A was the sole member of a scheme under which the trustees had discretion as to how to apply a surplus which had arisen within her fund. She asked that her husband be included in the scheme and that the surplus be transferred to his fund. However, this was not completed successfully before the company was closed following the retirement of Mrs A and the vesting of her pension benefits.
After the company had been dissolved, the Inland Revenue confirmed that no transfer of the surplus to Mrs A's husband could take place and that this surplus cash must be returned to the Crown, in line with long-established pension procedure.
What are the lessons for pension advi-sers? They should certainly make themselves familiar with the technical detail about the ultimate destination of pension scheme surpluses. There have been many cases over the years in which a large part of an individual's notional pension fund has been lost to a person or organisation other than the intended scheme member. Advisers should note the (slightly simplified) rules for the redirection of an occupational scheme surplus:
First, overfunding may remain within the scheme for the benefit of remaining members.
Second, if there are no remaining members, the fund may be returned to the sponsoring employer, less tax.
Finally, if the company has ceased to exist, as in this quoted case, the surplus must be remitted to the Crown.
There are a number of issues emanating from this case. Where an overfunding situation, which cannot be rectified, is identified in a scheme with one or more additional remaining members, it is important to ascertain whether the scheme member is content that the surplus should be credited to the remaining scheme members.
If not, it is worth considering bringing in new members – probably one or more close relatives – at least on minimal salaries to justify nominal pension contributions in order that the surplus may be allocated to that new member, usually at the discretion of the trustees.
A similar strategy of bringing in close relatives or friends may also be used where the member is the sole or last remaining member of the scheme. In this situation, the surplus cannot – without planning – go anywhere other than as a refund to the sponsoring employer. I have been made aware over the years of a number of occasions where a company has been sold prior to an overfunding being crystallised. The purchaser has then been presented with an unexpected windfall payment from the pension scheme.
Great care must be taken, when selling a company or business which sponsors an occupational pension scheme, to ensure that there is no surplus or that the surplus is distributed to the satisfaction of the scheme members before the sale is completed.
The final situation is where no company remains when a surplus is identified. This happens much more often than many advisers might imagine. The company could simply have been voluntarily dissolved or could have been placed into liquidation by creditors. Quite apart from there frequently being no remaining trustees to determine the beneficiary of the surplus (where, for example, the trustee was the company itself), if the member has effected a transfer or vested their benefits, the surplus cannot go either to the member or the now non-existent company. A windfall payment is then made to the Crown.
I remember some years ago hearing from a usually reliable pension source that unapplied payments from pension schemes represent by far the biggest source of revenue to Prince Charles. Now, even though I confess to being something of a monarchist, I would balk at the thought of any of my pension scheme monies defaulting to Prince Charles or any other member of the Royal Family.
So, there are many lessons to pension advisers from this single ombudsman report, not least that there is an inherent danger in making the sponsoring company the sole trustee. The greatest danger occurs when a company is dissolved, which by definition means that there is then no trustee to exercise discretionary powers and duties.
Although not a feature of this particular case reported by the Pensions Ombudsman, can I also draw attention to the situation which may arise in the event of the death of the “last man out” within an occupational pension scheme. This “last man” will very often be the driving force behind the company, except that there will usually have been little or no warning that advanced pension planning should be considered. It is therefore important that all the lessons from the Mrs A case should be taken into account from the date of the initial advice.
When I think back to my early days as a broker consultant with a pension office of reasonable quality, I cringe at the lack of knowledge or training which could have highlighted these important aspects of establishing and monitoring executive pension schemes and small self-administered schemes. An awareness of these issues differentiates a quality pension adviser from a salesperson. In the absence of in-house training, can I suggest that advisers can learn a great deal from making a regular discipline of reading determinations from the Pensions Ombudsman.
In my next article, I will consider further important issues relating to occupational pensions as brought to light by the Pensions Ombudsman. Note, in particular, that I will be concentrating much more on mainstream, smaller moneypurchase schemes rather than final-salary schemes, except in so far as pension transfers are involved.