An unfortunate boost to potential scammers?

An unfortunate boost to potential scammers?


Author: Heather Chandler

Applies to: England, Wales and Scotland

This article explores the Hughes vs Royal London case and what this means for access to pensions funds.

As with many pension issues, the devil is in the detail. This case involved a request for a cash equivalent transfer from a personal pension scheme, which was declined by the administrators, The Royal London Mutual Insurance Society Limited ("Royal London"). The pension holder Mrs Hughes had requested a transfer from her personal pension scheme to an occupational pension scheme to acquire transfer credits within that scheme. She had done so on the basis that she had acquired a right to a cash equivalent transfer.

In the initial case the Pensions Ombudsman had found in favour of Royal London who had refused to make the transfer, principally because they were concerned about pension liberation, but also on a technical point as to whether Mrs Hughes was an "earner" for the purposes of the definition of transfer credits. If she was not an earner as defined then she could not acquire transfer credits in her occupational pension scheme and would not have had the right to take a statutory cash equivalent transfer in the way requested.

Mrs Hughes appealed the decision of the Ombudsman on two counts. She argued that she was an "earner" for the purposes of the legislation and also that Royal London had a discretion under the terms of her personal pension to pay a non-statutory transfer, and had acted improperly in not deciding to exercise that discretion.

Mr Justice Morgan upheld the appeal of Mrs Hughes. He did so on the first of the two points appealed, deciding she was an "earner". Therefore did not find it necessary to look at whether or not Royal London should have used its discretion. This is unfortunate because Royal London would most likely have brought forward more information and evidence around why it did not use its discretion. This would have involved more consideration of its deliberations around the issue of pension liberation and their concerns garnering some judicial guidance on these concerns as reasons for not acting.

However, focusing on the technical point, the decision has the potential to make it more likely and easier to come up with arrangements to which members can request transfers which cannot then be blocked by legislation.

In looking at the meaning of "earner", Mr Justice Morgan looked at the relevant legislation principally contained in Chapter IV of Part IV of the Pension Schemes Act 1993 (1993 Act) as was relevant at the time and satisfied himself that the schemes concerned were occupational pension schemes and personal pension schemes within the meaning of that Act.

He also looked at the right to a cash equivalent and agreed that could be established.

The 1993 Act sets out ways of taking a cash equivalent and one of those ways in the case of a member of a personal pension scheme is to use those sums transferred to acquire transfer credits allowed under the rules of an occupational pension scheme. "Transfer Credits" are defined by Section 181 of the 1993 Act as meaning "rights allowed to an earner under the rules of an occupational pension scheme.". The definition therefore references "earners" and this is also defined by Section 181 as follows, "an earner and earnings are to be construed in accordance with Sections 34 and 112 of the Social Security Contributions and Benefits Act 1992. When you look then at the 1992 Act, "earnings" refers to "remuneration or profit derived from an employment" and an "earner" is to be construed accordingly. "Employment" is defined for these purposes as any trade business, profession, office or vocation.

Mr Justice Morgan's focus highlighted that nowhere within the chain of definitions or in the cash equivalent entitlement provisions did it specifically state that as an "earner" Mrs Hughes had to be an "earner" in relation to a scheme employer, (an employer in the occupational pension scheme to which she wished to take the transfer credits).

The Pensions Ombudsman when he considered the issue felt that it would be "a very strange result" if earners in some completely unrelated context to the scheme concerned could require a transfer value to be paid to that scheme. That view helps when thinking about pension liberation because it requires some definite link between the individual earner and the scheme to which they wish to make the transfer, and so limits the types of arrangements in respect of which a valid statutory request could be made. Therefore following the Pensions Ombudsman's original decision, as there was no such association, Mrs Hughes not receiving any remuneration from a scheme employer in relation to the occupational pension scheme, could not transfer money to that scheme.

However, in a clearly laid out decision Mr Justice Morgan referred back to the limitations of the Courts in terms of interpreting the meaning of legislation, being limited to resolving ambiguities and statutory language. Clearly the Court should be able to correct obvious drafting errors in statute but only in very rare cases would that involve imputing words into legislation. The issue with the interpretation that the Pensions Ombudsman had taken was that it involved reading in words that were not contained in the legislation.

In a case such as this the aim is not to attempt to reconstruct the intentions of the drafter, but to make sense of the text under consideration. In doing so, the position set out in the case of Inco Europe Limited v First Choice Distribution [2000] 1WLR586 remains instructive. Before deviating from the expressly stated language of legislation, the Court must be clear on three points:-

  1. The intended purpose of the statute or provision in question;
  2. That by inadvertence the drafts person and Parliament fail to give effect to that purpose in the provision in question; and
  3. The substance of the provision Parliament would have made although not necessarily the precise wording had the error in the bill been noticed.

All three are important but the third step is perhaps the most important because unless it is clear that what is being done is to implement a position that Parliament would have itself implemented, it would be crossing the boundary between construction and drafting, to insert words into a provision to gain a meaning.

The guidance provided by Inco Europe is generally helpful. In this case, however, it means that because the legislation itself does not specifically require an "earner" to be such because they are receiving remuneration from a scheme employer, the effect is to allow a wider range of arrangements to which transfers could be made. It confirms there is no need for a "link" of the payment of remuneration between the employer and the individual transferring in. This result is frustrating as it removes protections for individuals in transfer situations.

Unfortunately there is no end to the ingenuity of potential scammers in coming up with ways and means to gain access to money from pension schemes given to them unwittingly by members. This particular point whilst largely a logical application of the principles in Inco Europe, gives rise to a position which in our view the Pensions Ombudsman correctly described as "very odd" and is a point of weakness that can be exploited.

It remains crucial that when dealing with transfers of concern, that trustees, employers and administrators seek legal advice as necessary, at the first opportunity.


This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.