Ministry of Defence pays compensation
The Ministry of Defence will have to reinstate a former member to the Armed Forces Pension Scheme and pay him £2,000 for severe distress and inconvenience, after wrongly allowing him to transfer to the Capita Oak Pension Scheme, a scam that invested in storage pods.
The case concerned Mr S, who had been an active member of the AFPS from November 3 1988 to February 12 2001, after which he became a deferred member.
He was approached by a representative of the Capita Oak scheme and persuaded to transfer his benefits into it, on the promise of higher returns than he would have enjoyed under the AFPS.
The AFPS received his transfer request in January 2013, and the MoD provided him with a notional transfer value later that same month.
It subsequently checked that the Capita Oak scheme was registered with HM Revenue & Customs as part of its due diligence checks, but the transfer was then delayed for several months, as Mr S had not provided the MoD with sufficient proof of identification.
In the interim, the Pensions Regulator published updated guidance on scams and transfers, but the MoD did not use the delay as an opportunity to implement the new requirements. It only began implementing them in November 2013, after Mr S’s transfer had been completed.
In August, Mr S provided the MoD with proof that he was in receipt of jobseeker’s allowance, a fact which proved crucial to the Pensions Ombudsman’s determination as it established that the MoD was in possession of information affecting Mr S’s transfer rights — specifically, information that proved he had no such rights, because he was not an “earner” as defined and required by the Capita Oak scheme rules.
The transfer nonetheless proceeded, and the MoD gave final approval in September 2013. The Capita Oak scheme subsequently failed and Mr S appealed to the ombudsman, alleging that the MoD had failed to carry out due diligence checks that would have stopped the transfer.
‘Grey area’ not an excuse
Though the government has since banned transfers out of unfunded public sector schemes to funded private sector defined contribution schemes, Sackers partner James Bingham told Pensions Expert that this prohibition “was introduced by the Pension Schemes Act 2015 with effect from April 6 2015. This case concerned a request and a transfer that was made before this restriction came into force”.
Simon James, senior associate at Squire Patton Boggs, explained that the ombudsman’s analysis was primarily based “on whether Mr S could have acquired ‘transfer credits’ under the Capita Oak scheme (as an occupational pension scheme) and, more specifically, whether Mr S could acquire rights allowed to an ‘earner’ under the rules of the Capita Oak scheme”.
Thus, though he might in theory have been allowed to transfer at the time, the fact that Mr S was in possession of jobseeker’s allowance — and that the MoD was aware of this — invalidated his right to transfer.
Part of the MoD’s defence against the charge of maladministration rested on the timing of Mr S’s transfer request. It argued that he applied for the transfer before TPR issued its updated transfers guidance in February 2013, with the MoD completing its formal due diligence processes in March in accordance with the law and guidance as it existed before the update.
According to the ombudsman’s decision, the MoD’s contention was that the ombudsman “must apply the standards of good administration as they stood at the period in question, not subsequently or with the benefit of hindsight".
The fact that Mr S’s request was not finalised until September was irrelevant, the MoD contended, since the due diligence checks were already complete and it was simply waiting for Mr S to provide it with proper identification.
The ombudsman gave this argument short shrift, however, countering: “I do not believe it is tenable for a reasonably competent pension provider to argue it was not aware of the regulator’s announcement before September 2013, and therefore unable to put the guidance into practice until November 2013.”
The MoD tried to argue that the ombudsman has typically allowed a grace period allowing for scheme administrators to become aware of, and act on, updated guidance from regulators. However, the ombudsman did not accept that it had recourse to this grace period, which is typically one month, since its decision in the case of Mr S was made six months after TPR published its guidance.
Bingham said that, given the frequency of new guidance, “it is not unusual for transfer requests to be made in the ‘grey area’ as administrators and trustees adapt from an old regime to a new regime”.
“In our experience, the Pensions Ombudsman will consider each case on its particular facts and the key issue is whether, in the circumstances, it was reasonable for an administrator to progress the transfer in line with the previous industry practice or whether they should have switched their processes to meet the new requirements,” he explained.
The ombudsman ‘will always trump the rules’
Besides a £2,000 payment for the severe distress and inconvenience caused to Mr S by its maladministration in the transfer application, the ombusdman also ordered the MoD to restore his benefits and entitlement. This is on the basis that, though the transfer was completed, it was legally invalid and so should not have happened.
The AFPS is thus obliged to give to Mr S the same status he enjoyed before the transfer, as though that transfer had never in fact occurred.
The MoD argued that it was impossible to restore Mr S to the AFPS because the relevant section is now closed to new members, and the scheme rules would not allow his readmittance.
The alternative would be to establish a new, bespoke scheme solely for Mr S’s benefit, which the MoD said would put him in a superior position relative to other members, and result in an outcome better than he would have achieved through the courts.
Ombudsman Anthony Arter countered that, where the law is concerned, Mr S “is not a new member, but a previous member whose membership ought never to have ceased”.
“He should therefore not be considered as rejoining the AFPS, but rather as having continuing membership as a deferred member. Moreover, as Mr S’s transfer was invalid at law, it reverts back to the originator/the scheme,” he said.
“Notwithstanding the cost to the public purse, the purpose of the proposed redress is to place Mr S in the position he would have been but for MoD’s maladministration.
“If MoD maintains that it is unable to reinstate Mr S’ benefits into AFPS, then it should make arrangements to provide Mr S with the equivalent benefits he would have received had he remained in AFPS. I do not see that setting up such a scheme puts Mr S in a more favourable position than the courts would provide. How MoD provides the equivalent benefits is a matter for MoD.”
James told Pensions Expert that, though the AFPS is established under statute and the ombudsman’s determination “does not override legislation”, they are nonetheless “binding on the parties to a complaint, including the trustees or managers of the relevant scheme”.
“If a party fails to comply with a Pensions Ombudsman’s determination, the other party could apply to the county court for the determination to be enforced,” he explained.
In the case of Mr S, the ombudsman has “only clarified the application of the rules of the scheme to Mr S, rather than having to override those rules or requiring the MoD to set up a new scheme”.
Bingham concurred, saying: “Although the scheme rules may not provide this, where a court or ombudsman make an order of this nature the trustee has to comply with it, so in that regard you could say that the ombudsman will always trump the rules.”