Pensions Ombudsman update August October Date Event Summary and Impact Pensions Ombudsman: Bulk transfer 21 August A member suffered no loss from a "Barber Window" miscalculation Hayes (PO-2113/PO-2114) The Deputy Pensions Ombudsman has given her determination in a complaint by Mr Hayes against the trustees of the Synthetic Chemicals Pension Scheme (the Scheme Trustee) and the trustees of the SI Group Pension Plan (the Plan Trustee). She partially upheld a complaint by a member who said that a "transfer credit" benefit uplift had been underpaid because the wrong "Barber Window" was used. Mr Hayes was a member of the Synthetic Chemicals Pension Scheme (the Scheme). His employer sold a part of its business in 2000 and the employees, of which Mr Hayes was one, transferring under the agreement were given a choice of either taking their Scheme benefits early when they left, or transferring their accrued benefits to their new employer's plan called the SI Group Pension Plan (the Plan). The transfer value was calculated on a past service reserve basis assuming that the majority of members would carry on in active service, whether they were male or female. The Plan offered a 25% uplift (Transfer Credit) to all transferring members to show that members would not receive a deduction if they took their benefits early at age 62 under the Scheme but not until age 65 under the Plan. Mr Hayes chose to transfer his benefits and received 18 years and eight months pensionable service in the Plan, equating to 14 years and 11 months service in the Scheme and a Transfer Credit in the Plan of 3 years and 9 months. In 2011, the Scheme Trustees realised that there had been an error calculating the bulk transfer value because the "Barber Window" that was used ended in 1994 and not 1991. The Scheme Trustee offered to pay an additional transfer sum of 322,466 to the Plan Trustee in respect of the longer "Barber Window", however, the Plan Trustee refused to accept this because it was not accepting any more transfers into the Plan. The Plan Trustees then contacted their members to inform them about the error and that they would contact each member individually to confirm the value of each member's fund. As a result of the judgment in Coloroll, which placed the obligation to pay increased benefits due to members was the Plan's responsibility; the Scheme Trustee withdrew the above offer. Consequently, the Plan Trustees informed the members that they would not be able to pay the members an increase in benefits due under the Plan. Mr Hayes complained that he therefore suffered financial loss because the value of his accrued benefits transferred from the Scheme to the
Plan was wrong. If the correct "Barber Window" was used then he would have received a higher Transfer Credit, and so he would not have transferred from the Scheme. The Deputy Ombudsman partially upheld the complaint against the Plan Trustee but not against the Scheme Trustee. The 323,466 transfer value was unrelated to the Transfer Credit and the calculation of the Transfer Credit uplift was not contrary to the decision in the Barber case. This would only have happened if there had been a difference in the percentage of credit awarded between male and female members because there were different provisions for early retirement for each, which was not the case. Mr Hayes' 14 years 11 months pensionable service was transferred to the Plan and so he suffered no more than if he had stayed in the Scheme. However, it was the Plan's letter in June 2011, which misled Mr Hayes to think that he would receive more funds and so the Plan Trustees were directed to pay him 300 for his loss of expectation and for the inconvenience caused in pursuing his complaint. Impact: This complaint could arguably have been avoided quite easily because the complaint arose from the complainant's misunderstanding of the effect the "Barber Window", which in turn, arose from the Plan Trustee's correspondence to the members. This highlights the need for Trustee legal advisors to review and check member communications before they are sent, especially where there are complex legal issues involved. Financial Ombudsman Service: Financial adviser gave wrong advice on a personal pension 16 September A financial adviser gave incorrect financial advice concerning trivial commutation of a personal pension (Decision Reference DRN1380190) The Financial Ombudsman Service (the FOS) has upheld a complaint against a financial adviser, Towry Limited (Towry), who gave the wrong advice to the complainant. The facts of the complaint are not clear, however, it appears that the complainant set up a personal pension policy with the deliberate intention to withdraw the policy benefits as a lump-sum when she reached 55 years old. She complained that she was forced to take an annuity because Towry failed to warn her that the current tax rules only permit trivial commutation once an individual reaches 60 years old. The FOS upheld the complaint stating that the complainant would not have taken out the policy had she been informed that the benefits could not be withdrawn as a lump sum. Towry were directed to unwind the annuity and ordered Towry to pay the complainant compensation equal to the gilts-based investment return on the contributions paid by the complainant until her 55 birthday, with applicable interest on the return from her 55 th birthday to the date of payment added on top. Towry was also ordered to pay 250 compensation for the distress and inconvenience caused to the complainant. Impact: The Government's DC pension flexibility reforms are due, from April 2015, to reduce the minimum age for taking a trivial commutation lump sum or small lump sum to 55 years old. Furthermore, trivial commutation lump sums will only be payable in future from DB schemes on the basis that they will not be needed in DC schemes. Pensions Ombudsman: Death benefits payable from a member's nomination form
15 October Death benefits: the Employer wrongly assumed the member's wishes had changed after completing her nomination form McNee (PO-2790/PO-4183): The Pensions Ombudsman has given his determination in a complaint brought by Mr and Mrs McNee against their deceased daughter's employer, the Royal Borough of Kensington and Chelsea (the Employer) and Capita (the Administrator). The Ombudsman upheld the parents' complaint on the basis that the Employer failed to give proper consideration to Mr and Mrs McNee as eligible recipients of a lump sum death grant. Ms McNee was the daughter of Mr and Mrs McNee and was a member of the Local Government Pension Scheme (LGPS). Ms McNee completed a death grant nomination form in 2005 in favour of her parents. She had a son with Mr R in 2009 and revised her will in April 2010, which stated her residuary estate was now to be held on trust for her son until he turned 30 years old. Ms McNee left her Employer in November 2010 and became a deferred member of the LGPS. She died in September 2011, upon which her son began receiving a child's pension from the LGPS. The Administrator sent a copy of Ms McNee's will to the Employer and the Employer asked the Administrator to find out whether Ms McNee's parents were still alive, which they were. However, nothing was done by either party to pursue the matter, once the Administrator had tried to obtain the parents' contact details. On 31 January 2013, the Court then issued grant of representation to allow Ms McNee's estate to be administered by Mr R and another trustee for the use and benefit of her son. In February 2013, the Employer made the decision to make the lump sum death grant payable under the LGPS to Mr R and the other trustee for Ms McNee's son. Mr and Mrs McNee subsequently complained unsuccessfully under the LGPS internal dispute resolution procedure. Mr and Mrs McNee then brought their complaint before the Ombudsman arguing that the Employer and the Administrator had contradicted their daughter's expression of wish in her 2005 nomination form by refusing to pay the lump sum death benefit to them. The Employer argued that it had made its decision because the birth of Ms McNee's son constituted a significant change in her circumstances, which could only suggest that she had forgotten to update her 2005 nomination form. The Ombudsman upheld the complaint against the Employer but dismissed it as against the Administrator because it was the Employer's decision alone to make the payment. Despite the fact that the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 gave the Employer the discretion to make the death payment to anyone appearing to it to be the member's nominee, personal representative, relative or dependant at any time, the Employer failed to take into account all the relevant matters and ask itself the correct questions before making the payment to Ms McNee's son. Although the 2005 nomination form was not binding on the Employer, the Ombudsman held that the Employer should have taken appropriate steps to establish who all the potential recipients of the death lump sum were before making any decisions. This included contacting Mr and Mrs McNee at the address given in the 2005 nomination form to enable them to provide details of their position. The Employer should have considered these details alongside the competing interests of Mr R, the other trustee and Ms McNee's son before making its decision about whom to make the payment to, (in accordance with the LGPS).
The Ombudsman therefore ordered the Employer to contact Mr and Mrs McNee and then reconsider their decision on receipt of this information. If the Employer decided to award any part of the death grant, the Employer must settle any potential tax charge which HMRC decides to treat as an unauthorised payment. The Employer was also ordered to pay Mr and Mrs McNee 250 each for the resulting inconvenience and distress caused. Impact: This decision reminds Trustees of the need to ensure they have properly investigated a deceased member's personal circumstances before making any decision to distribute death benefits payable under discretionary trusts. The death benefit nomination form should be taken seriously despite the fact that it is not binding on Trustees. Without contrary evidence, the Trustees should assume in the first instance that the content of this form reflects the deceased member's intentions. Pensions Ombudsman: Personal Pensions and payment of an exit penalty 21 October Personal pensions: a member could not recover the exit penalty despite the Employer's administrative errors Underwood (PO-1472): The Pensions Ombudsman has given his determination in a complaint by Mr John Underwood against Aegon. Mr Underwood was a member of the Aegon Personal Pension Plan (the Plan). He instructed Aegon to transfer 195,000 from his 300,000 fund value in the Plan (the Fund) to an arrangement with Capita at the end of 2010. However, he changed his mind and asked Aegon to reverse the transfer and make this to Liverpool Victoria instead (the First Transfer). Aegon carried out the First Transfer in February 2011. He also instructed Aegon to change 10% of his cash fund to two equity funds within the Plan (the Switch). Aegon later informed Mr Underwood that there had been errors in his Fund and he would not be able to access the online facility for managing his Fund for the next two weeks whilst this was resolved. It was not until 12 August 2011 that Aegon informed him the problem had been fixed and that the Switch requested on 2 March 2011 had now been completed. Aegon subsequently provided incorrect information about Mr Underwood's Fund to his independent financial advisor (IFA) and misdirected monies that had mistakenly been left out of the First Transfer. The Pensions Advisory Service also discovered that a switch had been incorrectly processed by Aegon in 2008. These failings caused Mr Underwood to transfer his Fund of 122,143, including the 3,425 exit penalty, out of the Plan. Mr Underwood complained to the Ombudsman that during the six months between March and August 2011, he was not able to manage his Fund to mitigate the loss it suffered during that period and so Aegon should waive the exit penalty. He also argued that Aegon had failed to correctly inform him about the cause and amount of time it would take to resolve the problem with his Fund. Aegon contended that Mr Underwood could have requested manual valuations and switched by telephone or fax during the "rebuild" of his Fund. Aegon also offered to pay Mr Underwood 483 in compensation, to include 350 for his distress and inconvenience and his IFA's fees of 952. The Ombudsman only partially upheld the complaint, although it noted the extensive list of failings Aegon had caused. Due to the fact that Aegon had informed Mr Underwood that the problems with his Fund would be resolved, it was reasonable for him not to request manual valuations and switches during this time. It was not however possible to quantify the amount of harm Mr
Underwood suffered because it was impossible to know what switches he might have made during this time had he had access to his Fund online, or whether these switches would have benefitted him. In addition, because Mr Underwood said that he would not have left the Plan had Aegon not made these administrative errors, Mr Underwood was not currently any worse off, as Aegon would have recovered an amount equivalent to the exit penalty in the form of charges, had Mr Underwood remained in the Plan. The Ombudsman held that he could not therefore recover the penalty; although Aegon was directed to pay him the "nominal and proportionate sum" of 625 for the loss of opportunity to manage his Fund, and 800 for the "significant" annoyance and distress caused by Aegon's failings. Impact: Due to the publication of a code of practice by the Pensions Regulator in 2013, and the upcoming regulations to be made under the Pensions Act, DC governance is under fresh scrutiny. One new governance requirement is that transfers must be processed "promptly and accurately" by pension scheme providers. It will also be interesting to see how these new governance and charges regime will affect exit penalties. It appears they will be covered by the cap on charges, however, this cap will only apply to default funds in auto-enrolment schemes. The new governance standards will require Trustees and DC scheme providers to ensure that charges and costs represent "fair value" for members. Deputy Pensions Ombudsman: Pension scheme mergers 29 October Pension scheme mergers: discretionary increases were not an established custom Bains (PO-4065): The Deputy Pensions Ombudsman has given her determination in a complaint by Mr Peter Bains against his employer, Hewlett- Packard Limited (the Employer) and the trustees (the Trustees) of the Hewlett Packard Limited Retirement Benefits Plan (the HP Plan). Mr Bains was a member of his former employer's pension scheme, the Digital Equipment Company Limited Plan (the Digital Plan), which was ultimately acquired by the Employer in 2002. The Digital Plan merged with the HP Plan in 2006 and the Digital Plan members, of which Mr Bains was one, were moved to a new section in the HP Plan. The trust deed and rules in the Digital Plan and the Digital Plan section of the HP Plan stated that increases to pensions for pensionable service before 6 April 1997 were made a t the discretion of the employer "acting on" actuarial advice. An actuarial certificate was provided in 2006 which confirmed that any established custom for making discretionary benefits or increases under the transferring scheme (the Digital Plan) should be treated in "broadly no less favourable way" in the receiving scheme (the HP Plan. However, whilst the legal notice of the merger provided for such discretionary increases to be continued to be paid under the HP Plan, the merger deed stated that such discretionary increases to pensions in payment were "not exercised as an established custom". Mr Bains complained to the Ombudsman that no increases to pensions in payment for pre-6 April 1997 pensionable service were made after the merger in 2006, except in 2008. This was despite the fact that such increases had been regularly made every year at varying rates and were an established custom which the Employer should have continued. The Employer had therefore broken its implied duty of good faith to him and the Trustees had failed to uphold their fiduciary obligations in acting in the beneficiaries' best interests, which he claimed caused him to suffer substantial financial loss.
The Deputy Ombudsman pointed out that in considering this complaint, she was only able to look back three years from the date Mr Bains discovered the Employer had not made the increased payments. This meant that she could only consider the pension increase decisions the Employer made in 2011, 2012 and 2013. This did not prevent her from examining the events surrounding the execution of the merger deed in 2006 which had recently come to Mr Bain's attention. The Ombudsman held that it was not enough for the past award of discretionary increases by the principal employer to create an established custom. The governing documentation of the Plan must reflect this custom for it to be an "established custom" and this was not provided for in the Plan trust deed and rules. The Employer was therefore free to exercise its absolute discretion, acting on actuarial advice, in dealing with pension increases as this was permitted by the Plan rules. It was noted that, had the Employer made a contradictory contractual statement (ie by issuing a guarantee), the position would have been different. Due to the fact that no established custom had been created, the Trustees could not have failed to protect this custom by entering into the merger deed and so they did not breach their fiduciary duty to Mr Bains. The ombudsman concluded that during the last three years, the Employer had exercised its discretion properly in accordance with actuarial advice, taking account of all relevant factors (even where it decided not to award a discretionary increase in 2013 when the actuaries advised that it would be reasonable for the Employer to do so). The Employer's decisions were also not irrational or perverse enough to seriously damage the contractual relationship of trust and confidence between it and Mr Bains and so its duty of good faith was not breached. Impact: Generally, Trustees of merged schemes should act carefully when faced with members' complaints about past discretionary practices due to the fact that such practices often differ considerable between schemes. The provisions in the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991, which apply on a bulk transfer without consent, only give special protection to discretionary increases to the extent that they are embedded in the transferring scheme as an established custom. Whilst the Deputy Ombudsman said that she would have expected the established practice to be contained in the rules, this is not always necessary for it to be binding. Provided, however, that they have properly evaluated the exercise of discretions in the period leading up to the merger and the actuary was willing to sign off on the necessary actuarial certification, they ought to be able to resist such complaints. Key contacts Sasha Butterworth, Partner +44 (0)333 006 0228 sasha.butterworth@tltsolicitors.com Chris Crighton, Associate +44 (0)333 006 0498 chris.crighton@tltsolicitors.com
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