A recent Pensions Ombudsman determination has opened the floodgates for financial loss claims resulting from the mere possibility of missing out on stock market profit, due to trustees being tardy in processing transfers.
In previous decisions, compensation was usually limited to stress and inconvenience types of awards, with loss of opportunity not necessarily quantifiable as a financial loss.
With Covid-19 hampering many schemes’ administration, the end of the year could now see an avalanche of financial loss claims, warned Jessica Kerslake, counsel at Allen & Overy.
Speaking at the Society of Pension Professionals’ legal update webinar on Tuesday, Ms Kerslake argued: “Financial loss could now be relevant when there has been a delay in switching investments as a result of the Covid-19 virus.”
It is going to make it harder for trustees to argue that there is no financial loss, as it is not certain what exactly the member would have done with the money had they received it sooner
Jessica Kerslake, Allen & Overy
James Riley, SPP president, declared that trustees were “caught between a rock and hard place” as they grappled with the need for due diligence on scams, with the imperative to act speedily to prevent lost stock market opportunities.
Five-month delay resulted in investment loss
At the centre of this issue is the determination published on August 12 by the Pensions Ombudsman, which found in favour of Mr T, who argued that James Hay caused an undue and avoidable delay in the transfer of his pension to a new provider.
Mr T had cash and stocks with Barclays Stockbrokers in his small self-administered pension as well as £220,000 in cash, but emailed James Hay to begin the transfer on March 24 2016 after BSB notified him that it would be closing its pension trader accounts from June 30 2016.
While telling James Hay the transfer must be done before this closure, Mr T also made it known that he wanted the transfer to go through before the June 23 EU referendum.
This was not achieved and instead, on August 19 2016, £250,000 in cash was transferred from James Hay to Mr T’s new self-invested personal pension with Hargreaves Lansdown.
To compensate him for this, James Hay was ordered to pay £43,700 (plus interest) to his new pension plan.
The decision followed an initial hearing where it is was determined that the Sipp provider had to pay Mr T £2,000 in recognition of the “very significant distress and inconvenience caused by its maladministration”, but no compensation for financial loss was awarded at the time.
Mr T appealed to the High Court, which overturned the initial decision and referred the case back to the Pensions Ombudsman for a further hearing.
Commenting on the case at the SPP webinar, Claire Carroll, partner at Eversheds Sutherland, explained that the ombudsman “had concluded that the losses claims were too uncertain and not reasonably foreseeable”.
Ms Carroll noted that there were a number of reasons for this decision. For example, “the member hadn’t told James Hay the specific shares he wanted to buy. He wasn’t clear that he would have been able to purchase the shares and the price and the amount he wanted, and what price he would have paid and what the stock market movement would have been”, she said.
However, the High Court held that the ombudsman “was applying the wrong test and had set the bar too high”, and that it was “confusing recoverability with quantification”.
Giving his reasons, the judge stated: “When a customer asks for his pension pot to be moved from one provider to another, it is obvious that it is for the purpose or the possible purpose of investment.
“It is equally obvious that if there is delay through maladministration of the transfer, that the investor will or may lose the opportunity to invest over that period, and if there are spikes or perceived spikes in the market during that period that is likely or foreseeable to cause the investor loss,” the judge added.
Worrying implications for trustees
Despite being a determination looking at a personal pension transfer, the ombudsman’s decision is expected to have far-reaching implications for other schemes trustees.
Ms Kerslake said: “It is going to make it harder for trustees to argue that there is no financial loss, as it is not certain what exactly the member would have done with the money had they received it sooner. It could result in more cases where financial loss is being awarded.”
Speaking at the same event, Edward Brown, partner at Hogan Lovells International, warned that the determination “is potentially quite worrying for schemes”.
Ombudsman finds ‘maladministration’ in BSPS transfer
The trustees of the old British Steel Pension Scheme have been ordered to pay out to a steelworker, after “maladministration” meant he received a pension transfer lower than he could have done.
He explained that it will be hard for trustees to balance the due diligence needed to be conducted if there are suspicions of a scam with the need to have a quick turnaround to avoid investment loss.
“I think the answer is to have a very vigorous process and clear service-level agreements with your administrators. If it’s going to give rise to scam questions, flag this at an early stage and not half way down the process.”
Mr Brown added: “It is prudent to ask in the first response if there is a particular reason to transfer and a particular time by which you need to do it. I know it is an extra step, but if the ombudsman is going to be thinking about awarding compensation for lost investment opportunities, at least that will put you in a better position if members argue later that they were going to do X and Y investments.”
