Global Assets, April 2012 – Stephen Gilchrist looks at illegal pension schemes
How to Lose Your Pension
By Stephen Gilchrist
2012 started badly for about 400 investors who placed lb25 million with Ark Business Consulting and who stand to lose millions of pounds in a fraudulent pension "unlocking" scheme. Pension schemes have coming under the spotlight in recent months as a result of scrutiny by the combined might of the Pension Regulator, the FSA and HMRC. Last year both the FSA and HMRC warned investors of the risks they face when accessing pension funds before they reach age 55.
Unfortunately for those pension scheme members who subscribed to a 'Pensions Reciprocation Plan' (PRP) within a structure rather optimistically called "Maximising Pension Value Arrangement" (MPVA), it recently all ended in prospective disaster.
The dodgy scheme was spotted last year by the Pensions Regulator-the regulator of work-based pension schemes in the UK. In May 2011 and the Regulator appointed independent trustee firm Dalriada Trustees to seize control of the bank accounts of six schemes used for pension reciprocation and on 16th December 2011 the High Court in London ruled that the scheme was indeed illegal.
Dalriada had referred the scheme to the High Court for a determination as to its lawfulness and to ascertain whether the loans were valid exercises of the powers of investment under the schemes.This cunning plan involved two pension schemes making reciprocal loans of funds to specific members of each other's schemes and operated by paying out 50pc of a member's pension fund in the form of a reciprocal loan with another investor. Using loans, Ark managed to make payments before the normal 55 minimum age.
The defendants in the case were either scheme members or former scheme trustees who had made such loans. In the rather complex legal argument, Dalriada argued that a loan was a "payment" within the meaning of the Finance Act 2004 s.161(2)-FA 20014- (a payment made or benefit provided under, or in connection with, an investment acquired using sums or assets held for the purposes of a registered pension scheme). FA 2004 s.160(2) defines "unauthorised member payment" as meaning:
(a) a payment by a registered pension scheme to or in respect of a person who is or has been a member of the pension scheme which is not authorised by section 164, and
(b) anything which is to be treated as an unauthorised payment to or in respect of a person who is or has been a member of the pension scheme under this Part.
Dalriada Trustees Limited, the Claimant in the High Court action, maintained that any payment, including a loan which was not within the list in s. 164(1) was an unauthorised member payment and that it was immaterial that members of the reciprocal schemes were not necessarily paired.
The Court concluded that that the MPVA loans were unauthorised member payments as defined by s 160(2) of the Finance Act 2004 . Counsel in the case agreed that if that was the case they were outside the powers of the Schemes' trustees and void in equity, and could not be validated either retrospectively or prospectively by the amendments recently made to the Schemes.
The Court then went on to consider whether the MPVA loans were "investments".
The Court characterised the purpose of the PRP as being not investment but disinvestment. Accordingly the MPVA loans were outside the scope of the power of investment in the Schemes.
The Court then considered the position of the Trustees and their power of investment.
The Court held that the powers of the trustees are to make "investments" as set out in Clause 8.1 of each Trust Deed. The fact that everyone involved with the transactions wished to validate MPVA loans did not prevent the loans from being a fraud on the trustees' powers.
The Court finally found that amendments to the Schemes could not retrospectively validate the MPVA loans.
In summary, no payment of a pension may be made before the day on which the member reaches normal minimum pension age and S.164 sets out what payments are lawful. The loans made under the scheme did not fall into any of the 'lawful' categories and so, for those unfortunate individuals who had participated in the scheme, Mr Justice Bean found that the loans were outside the powers of the schemes' trustees, and were therefore void, as they constituted unauthorised payments. The Court also held that the making of the loans was a "fraud on the power of investment". The judge described the regulator's intervention as "plainly justified.
To add insult to injury much of the fund that was not invested in MPVAs has gone into unconventional property related investments abroad where there may be further losses.
If the judgment stands, Dalriada will need to consider how to go about recovering the MPVA loans already made. Likewise because MPVA loans made to date have been adjudged 'unauthorised payments', HMRC may look to impose 'unauthorised payment charges' on those members who have received an MPVA loan.
On 11th January 2012, Dalriada received copies of Notices of Appeal, lodged by Athena and Minerva (two of the Defendants). The Court has indicated that it will aim to make its first decision in the window 1st to 22nd March 2012. At that point, the Court could allow Athena and Minerva permission to appeal, or it could refuse permission or, alternatively, require a hearing to determine whether or not to allow permission. If permission to appeal is allowed, a hearing of the appeal will follow.
Dalriada advised Members who had received an MPVA payment that they should now arrange their financial affairs on the basis that they are required to repay all of the money they have received.
If judgement stands in favour of Dalriada (on behalf of the Pension Regulator) and if victim members were advised to participate in this shady arrangement on the basis that it was legal, they may have a professional negligence action against their IFA, and, may be able to seek some recompense from the financial services compensation scheme if their authorised IFA defaults. Also it is not inconceivable that a class action may be brought by the losers against those responsible for operating the scheme.