Personal PensionNov 21 2013

Liability and funds suitable for AVCs

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The complaint was upheld against Standard Life but not against BAE Systems pension funds trustees.

Mr White was an existing member of the BAE Systems pension scheme AVC when Standard Life was appointed as additional voluntary contributions provider in April 2001. Members were able to continue investing in their existing fund(s) or switch to a choice of Standard Life funds selected by the trustees. Throughout the operation of the scheme the trustees provided members with bespoke leaflets prepared by Standard Life which contained information about the funds.

In 2002 a Standard Life leaflet stated that the fund was the only option under ‘secure funds’ and described it as offering ‘the highest level of unit price stability’. It was listed as investing ‘not only in bank/building society deposits’ but also as holding ‘other short-term sterling assets’. Later in 2002 a letter from the trustees referred to the fund as ‘Standard Life’s cash fund’. During 2002 Mr White redirected all of his additional voluntary contribution investments to the fund.

In a leaflet issued in December 2007 Standard Life stated in the fund’s description that some of the ‘cash investments’ were ‘not ‘guaranteed’ in the same way as high street bank or building society accounts’ were and that “in extreme circumstances it is possible that the value of the fund may fall’. It also noted that under the Cash Lifestyle Profile – the default fund for members who do not make an investment choice – pension investments switch to the fund three months before retirement and further stated that the fund was suitable for members expecting to use some of their AVC benefits to secure a tax-free lump-sum. Mr White claimed that he did not receive this leaflet and that he was not aware of it until after he retired, but acknowledged that he received Standard Life’s leaflet with the same information in November 2008.

On 14 January 2009 the fund’s price fell by 4.8 per cent. Although the fund had been promoted as low risk, since 2007 around half of the funds under management had been invested in mortgage-backed securities (asset-backed floating rate notes) which incurred significant losses as a result of the housing market collapse.

In June 2009 the trustees advised scheme members of the loss and that Standard Life had made a payment into the fund to restore the position as if the loss had not occurred (in acknowledgment that many investors were not aware of the risks of investment strategies that had not clearly been set out in their literature).

Mr White continued to contribute to the fund until 31 July 2009 and retired on 1 August 2009.

In January 2010 the FSA issued a report in which it found that despite the fund being largely invested in asset-backed securities from July 2007, Standard Life had failed to disclose this. Standard Life was fined £2.45m for the publication of misleading marketing material for the fund.

Mr White claimed that his financial decisions were prudent and taken with great care and that his AVC contributions were governed by his need to achieve a specific pension level. He cited various phrases in the leaflets between 2007 and 2009 which were misleading or not suitably clear and referred to the FSA report and the determination in Mr J Petrie v The Standard Life Assurance (November 2009) in which the descriptions of the fund were found to be misleading because the content and nature of the fund could not be readily determined from the literature.

Standard Life’s position was that although the fund was classed as low risk, it did not carry any guarantee that the unit price would not fall. Both Standard Life and the trustees argued that Mr White had chosen to invest and stay invested in the fund and that the Petrie case had no precedent value.

The ombudsman found that although Petrie had no strict precedent value, it had not been ‘appealed or substantially countered’ by Standard Life, despite the opportunity in the present case. The ombudsman accepted that Mr White had a risk-averse investment style and did not demur from the judgement in Petrie that the fall in November 2008 could not have been expected. Mr White was awarded £500 as compensation from Standard Life for actual loss and non-financial injustice (calculated by reference to Mr White’s overall retirement value and the period from July 2007 until Mr White’s retirement, less the remediation paid for the January 2009 fall and a downward adjustment for the tax which would have applied).

This case is interesting as there have only been a handful of ombudsman decisions relating to AVCs. This is an area which is likely to see further complaints as members of defined contribution schemes continue to invest in an increasing range of funds. To avoid liability trustees must continue to thoroughly vet the funds they select and, to the best of their ability, ensure that funds are accurately described to the members.

Danny Tsang is a pensions partner of law firm Simmons & Simmons