International Adviser, January 2012 – Stephen Gilchrist discusses pension law
The wrong arm of pension law
How tempting it is to try and find a lawful way of releasing pension capital prior to retirement without breaching tax rules. That pot of money is just lying there, waiting to be unlocked.
Unfortunately for those pension scheme members who subscribed to a 'Pensions Reciprocation Plan' within a structure rather optimistically called "Maximising Pension Value Arrangement" (MPVA), it recently all ended in prospective disaster.
On 16 Dec, 2011 the High Court in London ruled that the scheme was illegal.
The dodgy scheme was spotted a while ago by the Pensions Regulator - the regulator of work-based pension schemes in the UK. In May 2011, the regulator appointed independent trustee firm Dalriada Trustees to seize control of the bank accounts of six schemes used for pension reciprocation due to concerns the loans could be legally void.
The six schemes were operated by Ark Business Consulting and central to the Ark model was a structure which used loans between pension schemes as a means of unlocking pension capital prior to retirement.
Dalriada 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. The defendants 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) (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).
It maintained that any payment, including a loan which was not within the list in s.164(1) was an unauthorised member payment for the purposes of the Act and that it was immaterial that members of the reciprocal schemes were not necessarily paired.
Generally speaking, no payment of a pension may be made before the day on which the member reaches normal minimum pension age, unless the ill-health condition was met immediately before the member became entitled to a pension under the pension scheme. S.164 sets out what payments are lawful. The loans made under the scheme did not fall into any of the stated 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 under the Finance Act 2004.
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.
In the meantime, and subject to any appeal, if the judgment stands, because MPVA loans are adjudged to have not been validly made, 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.
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.
Stephen Gilchrist is a solicitor and chairman and head of regulatory law at Saunders Law Ltd.