The QROPS question
There has been much debate over HMRC’s approach to the qualifying recognised overseas pension scheme (QROPS) issue and the impact this has on the relationship between the UK and the Crown Dependencies. One effect of HMRC’s announcements appears to be that the concentration of QROPS business will move to jurisdictions such as Gibraltar and Malta, with a loss of this business to Guernsey, Jersey and the Isle of Man.
Hard on the heels of the QROPS debate has followed extensive media coverage of aggressive tax planning for UK residents triggered by the K2 scheme and statements by the UK Prime Minister and the Exchequer Secretary to the Treasury describing these schemes as ‘morally repugnant’. Practitioners in the Crown Dependencies will, no doubt, have paid attention to these comments and the reputational risk that can arise from becoming associated, or involved, with such business.
While these events have brought the Crown Dependencies’ relationship with the UK into greater focus, there are broader issues that professional trustees should consider. Ignoring the obvious reputational risk for the Crown Dependencies as a whole, and for the operators of these schemes, recent events have highlighted some fundamental business risk considerations.
Race to the bottom
Leading up to the HMRC announcement, the race to the bottom on the cost of QROPS service provision did seem to have reached its nadir. Hardly a day passed without some form of fee undercutting appearing on computer screens, and then the ultimate: several well-known service providers offering free QROPS services.It may be going too far to describe this as mis-selling, but would any client who received proper independent advice really believe that it is possible for a trustee of a QROPS to provide its services for no charge whatsoever? Those services would include, as a minimum:
- Full due diligence on the proposed QROPS, beneficiaries, etc, including risk assessment.
- Review of independent advice to client on transfer of UK occupational entitlement.
- Review of UK and other tax advice on emigration from UK.
- Establishment of QROPS documentation.
- Transfer from UK scheme to QROPS.
- Selection and implementation of appropriate strategy in the best interests of beneficiaries.
This does not even consider the ongoing duties, including the maintenance of trust records, ensuring that any distributions comply with QROPS rules, all the accounting and administration for annual accounts and interim reporting, and regular monitoring of investment managers’ performance, as well as file and risk reviews, client-review meetings and the preparation of audited, consolidated QROPS accounts.
The answer to the question, of course, is that these services cannot be provided free, and a QROPS trustee cannot ignore these duties unless they wish to invite regulatory compliance problems or business risks that can have inevitable financial and litigation consequences.
Short-term gain, long-term risk
At the core, a QROPS is a fund that is intended to provide for the client during their retirement and, depending on the client’s lifespan, leave some remaining capital for their dependants.
However, rumours are rife that clients have been persuaded to establish QROPS driven by short-term considerations and not with their long-term financial needs in mind.
Comments like ‘I have no intention of returning to the UK after the five-year reporting period, so the pension can be busted after that’ are common from potential clients who appear to have spoken to QROPS service providers promoting their services as ‘pension-scheme busters’. If it is correct that QROPS trustees have been pension-busting by simply appointing out the entire fund to a beneficiary or moving assets into non-compliant QROPS, trustees risk incurring significant UK tax liabilities for beneficiaries and for the scheme itself. It is also difficult to conceive that this could result in anything other than a breach of trust if the QROPS itself was established in accordance with the rules.
“The feeding frenzy that spawned free QROPS has taken precedence over the overriding duty a trustee should observe”
This seems to offer fertile ground for litigation – whether by the members who have suffered a penal, unauthorised payment charge, or by future generations once they become aware of the breach. It is likely that providers and distributors of these pension-busting schemes have profited along the way, demanding hefty exit charges on transfer.
It can easily be argued that the feeding frenzy that spawned the free QROPS has taken precedence over the overriding duty that a trustee should observe: to act in the best interests of the beneficiaries.
Even where there is no pension-busting motive, free QROPS providers have to look elsewhere for revenue to subsidise their business model. In many cases those trustees have found that they can cross-subsidise their trustee service provision by accepting substantial front-end commissions and ongoing trail fees from investment managers. This should be fully disclosed by the QROPS trustee, but that is not always obvious – from the marketing material at least.
In an environment of challenging investment markets and increased focus on trustees’ monitoring of investment managers’ performance, what impact has the payment of these investment-related incentives to the QROPS trustee had on the net investment return to the QROPS and, ultimately, the security of the pension that the beneficiary or beneficiaries can expect to receive in their retirement?
The debate on QROPS should not be about HMRC’s stance, but rather about why QROPS trustees thought it would be prudent to offer a free – or heavily discounted – service in the first place, and how they are going to deal with the consequences of this ill-advised, short-term business model in a world where trustees’ obligations are becoming more onerous.
Traditional uses of trusts have invariably been built on succession planning, providing for the needs of future generations. While a QROPS is intended to provide a pension during the client’s lifetime, the ability to leave residual capital for dependants is a compelling reason to consider switching from an occupational pension scheme. The administration of structures designed to provide generational planning identifies closely with what ought to form the core business model for a professional trustee seeking to develop an enduring long- term business, as opposed to participating in short-term, high-risk, aggressive tax planning for clients.
To facilitate the distribution of an entire pension fund through a breach of trust, thwarting any benefit from the trust by other beneficiaries (who will in many cases be dependants) seems a totally flawed decision. It casts aside long-term succession planning for short-term gain, for the client and trustee, and can only lead to long-term problems for both parties.
The way forward
In light of these flaws and risks, HMRC’s position on QROPS does not, and should not, be viewed as a plan to disadvantage the Crown Dependencies against other international finance centres. Guernsey, Jersey and the Isle of Man have, for many decades, offered sound and expert tailored structures for the multigenerational benefit of clients, and this is the way forward if our reputations are to be maintained.
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