UK - The UK High Court has banned the use of pension reciprocation plans (PRPs), whereby pension scheme members are given the chance to borrow from rival scheme members' pension pots.

In a dispute between Ark Business Consulting and Dalriada Trustees - appointed as professional trustee to six defined contribution schemes after the Pensions Regulator voiced its concerns - the High Court ruled that the payments were unauthorised.

Speaking with IPE, Dalriada founder Brian Spence said he did not consider the ruling a victory, and that the desired outcome had simply been to achieve clarity.

"Most of our members will not welcome this judgment, as they may have to pay money back," he said.

Using PRPs, Ark had argued it was possible for one member to borrow as much as 50% of another member's pension pot - repaid over a 20 to 30-year period - as long as the loan had been taken from a second scheme, unconnected to the one in which the debtor was enrolled.

Spence said: "They claimed that it was perfectly legal from a tax point of view - presented it as a properly signed off methodology for running pension schemes.

"What the judge has said, subject to appeal, is that the payments are void and should have never been made. Even if they could have been made, they are effectively unauthorised payments and therefore subject to tax charges."

The six DC schemes, with combined assets of £25m (€30m), had loaned around £10m of assets using PRPs, paid in by just under 500 scheme members.

The High Court's Mr Justice Henderson had previously frozen £1m of assets belonging to Ark Business Consulting and two other entities.

Bill Galvin, chief executive at the Pensions Regulator, said he welcomed the "clarity" offered by the judgment.

"The Court has supported our view that this business model was an attempt to subvert pension law and a threat to members' pension benefits," he said.

"In this case, we were able to identify the risk quickly and step in to prevent more individuals from being taken in. But, sadly, more than 400 members are affected, and some will face substantial losses as a result of being misled in this manner."

A spokesman at the pensions regulator said it would ask the High Court to clarify the "practical consequences" of its ruling, in the event that Ark did not appeal.

Ark could not be reached for comment. 

Topics