What can I do if my pension fund is suspended?

One of the major perils in the minefield that is pension funds is a fund being suspended, which can happen for a variety of reasons. David Lamb, from The Pension Sharing Service, explains what your options are if, like Karen, this happens to you.

Karen was awarded 100% of one of Norman’s pensions, and a smaller share of another. Their solicitors have been very prudent because one pension had a guaranteed annuity that would have been lost on transfer, meaning neither party would benefit. This is the plan that Karen received the smaller share of.

Unfortunately, this order cannot be implemented because a couple of the funds the pension holds are suspended from trading.

Karen has a problem.

The transfer process explained

When a defined contribution scheme such as a personal pension is to be transferred, the assets – effectively unit trusts held by the pension trustee – are sold and the cash is then transferred to the receiving scheme. It is invested in a new portfolio of funds, ideally recommended by the pension creditor’s financial adviser, based upon their attitude to investment risk.

The issue

Many modern pension funds do not invest the money themselves, instead offering an external investment fund with different fund managers and a wide range of objectives. This is generally good but, occasionally, the funds can experience issues which can result in them being suspended from trading (cannot be bought or sold and turned into cash).

This could be for a variety of reasons, most commonly with property funds suffering liquidity issues (an inherent risk with these funds). If too many people want to disinvest, the fund may not hold enough liquid assets (cash) to pay them and therefore it may have to sell properties to raise the cash, and this can take some time.

This would not normally cause a problem for pension sharing order (PSO) as most orders are made for less than 100% of the fund, therefore other assets can be sold to provide the funds to be transferred.

Unfortunately, for Karen, the 100% order meant that the transfer must be all or nothing; the pension provider cannot transfer less than the amount stated in the PSO (for example leaving the suspended funds and transferring only those that are tradable).

Karen is currently surviving on her State pension and desperately needs the money she has been awarded.

Karen’s options

Karen has three options.

The first is to be patient and wait for the suspensions to be lifted. Unfortunately, one of the suspended funds is the Woodford Income Fund, which due to problems with the underlying investments could take years for the suspension to be lifted and be very costly to the investor. Karen cannot afford to wait very long.

Secondly, Karen could instruct her financial adviser and pension company to individually transfer all the underlying unit trusts by stock transfer, but this could take a long time, therefore incurring extra costs and is littered with pitfalls. Even the pension company advises against this and, in the end, Karen will still be stuck with funds that she cannot convert into cash for the foreseeable future to provide her with an income.

Karen’s third option would be at to apply to get the PSO amended so that she either takes a greater share from Norman’s other pension, but he could be reluctant to agree with this because he will effectively be giving up a high guaranteed income for (potentially) worthless funds.

For an easy life, Karen could write off the Woodford fund so that the transfer could proceed which she considers unreasonable because she is taking the hit, not Norman, and he would benefit if the fund recovers. In any event, if the Woodford fund makes up only 5% of the total portfolio, Karen could be losing almost £15,000.  She cannot afford this level of loss.

Do not tread on the mines!

What can family lawyers do to avoid similar situations?

I would strongly recommend that when asking for details on pensions, a breakdown of the individual funds is requested. This information will help identify any funds that are currently suspended or run the risk of suspension at short notice. If a pension portfolio holds these types of funds, a request for a PSO should not exceed the percentage of funds trading without this risk.

Where possible, spread the PSO over other pension policies to avoid having to take 100% of one particular product.

Ensure that the PSO is implemented as quickly as possible as fund suspensions can occur at any time, with relatively short notice.

I was discussing these issues with my wife, who is a family lawyer, and the very next day Aviva, which operates some of the largest property funds, gave notice that its funds (which are currently suspended) are to be wound up, with the properties being sold. Aviva has warned that this process could take up to two years.

Be aware of pensions holding this fund and ensure the order excludes the percentage held in this fund.

Don’t worry – assistance is available

If you have any concerns about the issues raised in this article, please do not hesitate to contact The Pension Sharing Service.

Tel.      0808 1781695/07708 690811

Email: david.lamb@thepensionsharingservice.co.uk

Web:    thepensionsharingservice.co.uk