PENSIONS OMBUDSMAN ROUND-UP MARCH 2016 IN THIS ISSUE 02 Introduction 03 Provision of incorrect information 04 Unreduced early retirement 06 Automatic enrolment 07 Statistics 08 Contact details 05 Recovery of overpayments
INTRODUCTION Welcome to DLA Piper s Pensions Ombudsman Round-Up publication in which we report on recent determinations made by the Pensions Ombudsman ( PO ) and Deputy Pensions Ombudsman ( DPO ). In this edition we look at determinations from January and February 2016. The first case concerns the provision of incorrect information and demonstrates the type of actions that could result in a successful claim of reliance as well as the need to ensure that disclaimer wording in benefit estimates is carefully drafted. The second case concerns the construction of a rule on eligibility for unreduced early retirement pensions and whether the employer was entitled to exercise its discretion to refuse to pay the benefit. In the third section we look at a case concerning an issue that may arise in overpayment cases where the member has a limitation defence to recovery. The fourth case looks at the interaction between contractual arrangements and automatic enrolment obligations and demonstrates the importance of clear communications. Finally, in the statistics section we provide a breakdown of the overall outcome of the January and February determinations. If you would like to know more about any of the items featured in this edition of Pensions Ombudsman Round-Up, please get in touch with your usual DLA Piper pensions contact or contact Cathryn Everest. Contact details can be found at the end of this newsletter. 02 Pensions Ombudsman Round-Up March 2016
PROVISION OF INCORRECT INFORMATION FACTS In this case (PO-5291) the Applicant was a member of a public service pension scheme and was provided with estimates of her benefits which overstated her length of service by around 4 years because they incorrectly included a previous period of scheme service between 1974 and 1978 in respect of which a refund had been paid. This meant that the Applicant received an estimate as at 31 March 2012 of an annual pension of 18,253 and a lump sum of 54,759. The error was discovered in July 2013 when the application for retirement at normal pension age of 1 August 2013 was considered. The correct benefits were an annual pension of 13,536 and a lump sum of 50,536. The estimates stated that The figures in this Statement are for illustration only. Every effort has been made to ensure accuracy, however this Statement confers no right to the benefits quoted. Given the reference to efforts to ensure accuracy, the Applicant argued that she was entitled to expect the correct figures to be the same, or at least very close to, those quoted. She states that, had she known the correct figures, she would not have retired in 2013 nor sold her house. The Applicant provided evidence that her house sale and purchase took place in March 2013 and explained that there would have been a large penalty if she ended her mortgage early and therefore she had needed to transfer it to a cheaper house before she stopped working. DPO S CONCLUSIONS The error of crediting the 1974 to 1978 service to the Applicant s membership record occurred before the current administrator was in place. The DPO accepted the administrator s explanation that it is not feasible for it to verify the membership record of every member each year. However, she stated that there was repeated assurance that Every effort has been made to ensure accuracy, but this was not true and therefore those words should not have been included. In light of this, the DPO considered that the Applicant was entitled to expect that her details were recorded accurately or, at worst, contained only trivial errors. The DPO noted that it is possible for members to be awarded compensation if they have relied on misinformation to their detriment and there is no suggestion that the member knew, or should have known, that a mistake had been made. The DPO was satisfied that this applied in the current case. She concluded that the Applicant s decision to sell her house (at a loss) and buy a cheaper house to fund her future mortgage payments and to repay various loans formed a logical part of her early retirement planning, which was based on the benefit illustrations she had received, and that, having changed her position, she could not reverse these decisions when the error was discovered in July 2013. The DPO stated that it was clear that the Applicant was unaware of the problem with the estimates when she elected to retire and that she should not have been expected to recall the refund. She stated that it is not totally surprising that the Applicant cannot remember a refund made over 35 years ago and also accepted the Applicant s explanation that she was suffering from post natal depression at the time which affected her memory. In addition, the DPO noted that the refund application was completed by another person (presumably the Applicant s then husband) which gives credence to her explanation that she does not recall receiving the refund. The DPO directed that the Applicant be paid the additional pension that would have been payable had she not received a refund and that this should be backdated to 1 August 2013, with a deduction made of the amount of the refund plus interest to reflect the fact that the Applicant has had the benefit of the refund for many years. An award of 500 was also made in relation to distress and inconvenience. This case provides an example of actions that can result in an applicant successfully arguing that they have relied on misinformation to their detriment. It also highlights the risks of using wording about every effort having been made to ensure accuracy of estimates even if it is accompanied by other wording that states the figures are only illustrations. www.dlapiper.com 03
UNREDUCED EARLY RETIREMENT FACTS The Applicant s complaint in this case (PO-5387) is that she has not been granted an unreduced early retirement pension under the scheme. In 2002, the Applicant was made redundant at age 47. In 2011, she applied for early retirement under the scheme. Her application was approved and she was informed that she would receive an actuarially reduced pension. The Applicant essentially argues that she does not need employer consent to take her benefits and that she is entitled to an unreduced pension from age 55 because she left the scheme by reason of redundancy. The determination looks at construction of the scheme rules, member communications and the question of whether the employer was entitled to exercise its discretion to refuse to pay an unreduced early retirement pension. DPO S CONCLUSIONS The DPO did not uphold the Applicant s complaint. She concluded that the terms of the rules had been applied correctly both in relation to employer consent and actuarial reduction. The relevant scheme rules state that employer consent is required. Whilst a 1991 announcement, a 1992 booklet and a 1996 booklet addendum did not refer to employer consent, the DPO stated that these documents do not override the 1997 scheme rules which governed the Applicant s benefits. The rules state that no actuarial reduction will be applied if the member retires before normal retirement date and on or after age 55 on grounds of redundancy. The DPO concluded that this means that the member had to be age 55 or over at the time she was made redundant, and did not agree with the Applicant s interpretation that she is entitled to claim an unreduced pension nearly 10 years after she was made redundant. The DPO then went on to consider whether there has been any breach of duty or maladministration on the part of the employer. The section of the determination setting out the employer s position includes that the employer confirmed that at the time of the 2011 application for early payment, it had a general policy of withholding consent to early retirement requests under the relevant rule. As a consequence of this, it did not give specific consideration to exercising its discretion in respect of the application. This was a result of the funding strain that such requests place on the scheme and its resources. The policy has been in place since in or around 2004 and relates to all members of the scheme unless they had a specific entitlement or promise relating to early retirement. The DPO stated that the issue is whether or not it was reasonable for the employer to withhold consent to members wishing to take their benefits early. She stated that, where an employer is exercising a discretionary power, it has an implied duty of good faith to its employees and set out some of the principles from case law in relation to that duty including that it is not a fiduciary duty meaning that an employer may take its own interests into account. The DPO concluded that it is clear that the employer is entitled to have regard to its own interests when exercising the discretion, which includes its own financial interests, and that she was unable to find that application of the employer s policy in this case constitutes any breach of duty or maladministration on their part causing injustice to the Applicant. This case is notable both for its conclusions on the construction of the scheme rules and that these were not overridden by member communications, and in confirming the principle that the employer is entitled to have regard to its own financial interests when exercising a discretion. 04 Pensions Ombudsman Round-Up March 2016
RECOVERY OF OVERPAYMENTS FACTS This determination (PO-8094) concerns a case which has previously been considered by the Ombudsman Service and the High Court on two occasions. The Applicant was granted early retirement from the Teachers Pension Scheme in 1997. If he became re-employed as a teacher, his pension was liable to be abated (that is, reduced) in order to ensure that the salary from his new employment plus his pension did not exceed the salary he had in his last employment. The Applicant was therefore required to inform the scheme if he became re-employed in education. He took up fulltime employment as a teacher in September 2001 and returned a Certificate of Re-employment to the scheme. At this point his pension did not need to be reduced because his earnings of around 14,500 did not exceed 21,000 which was the maximum he could earn before abatement would apply. However, the Applicant was informed that he should complete a further Certificate of Re-employment if his circumstances, including his salary, changed. The member did not do so, and in 2009 he was informed that his pension should have been reduced in each year from 2002/03 to 2008/09 and that there had been a net overpayment of around 36,000. In January 2014 the then DPO concluded that the Applicant did not have a change of position defence to recovery of the overpayment. In December 2014 the High Court dismissed the Applicant s appeal against this point but allowed the appeal on the grounds of limitation. The court concluded that when the administrators wrote to the Applicant in 2001, they must have known that the 14,500 earnings related to only a seven month period and therefore they should have realised that it was inevitable that if he continued in the same employment for the whole of the next tax year, even without a change in salary, a full year s salary would exceed the limit. The court stated that the administrator could, with reasonable diligence, have discovered the overpayment during the tax year 2002/03. The member therefore has a limitation defence to the recovery of any overpayments made more than six years before the date when the limitation period is regarded as having stopped (referred to in the determination as the cut-off date). The issues remitted to the PO to determine are the cut-off date and the quantum of any overpayment remaining payable. The judge had noted that for court cases, the relevant cut-off date is the date that the claim form is issued and expressed the provisional view that the closest analogy for complaints to the PO is the date that the formal complaint is made. PO S CONCLUSIONS The PO agreed with the Department for Education that the relevant cut-off date is 24 November 2009 when the administrator sought to recover the overpayment. The PO concluded that this action, whereby the administrator seeks a remedy to reverse the overpayments is the most analogous to a party issuing a court claim. In contrast, the date that the Applicant brought his complaint to the Ombudsman is an attempt to resist a claim for recovery. The PO also noted the respondent s argument that if the bringing of the member s complaint is the relevant cut-off point, the member could simply delay doing so in order to limit the respondent s ability to recover the overpayment. The PO therefore concluded that the administrator is able to recover overpayments from the Applicant for the six years prior to 24 November 2009. This means that the quantum of overpayments which can be recovered is 18,008. The PO stated that his expectation is that the administrator and the Applicant will now enter into sensible discussions about how the money should be repaid. Whilst this determination relates to a fairly technical question about limitation periods, it is notable because the court had stated that the cut-off date for Ombudsman cases is not clear, and we now have the PO's view on this point. This could be relevant for schemes when considering the extent to which recovery is possible in relation to particular scenarios. www.dlapiper.com 05
AUTOMATIC ENROLMENT FACTS A case determined in February (P0-3830) looks at the interaction between contractual arrangements and automatic enrolment obligations. In 2010 the Applicant s employment was transferred under TUPE to his current employer. In order to address a flexible benefit plan that was in place prior to the transfer, the Applicant was given two options: (i) join the pension scheme with the difference between a 15% allowance and the amount paid in contributions to be paid to him in cash; and (ii) take the pension allowance in cash, some or all of which could then be used for pension contributions. The Applicant elected for a 15% pension allowance in cash and to sacrifice 2.5% of his salary towards his pension. The Applicant s complaint relates to the fact that in September 2013 when the automatic enrolment duties started to apply to the employer, it wrote to the Applicant and informed him that the 1% mandatory minimum employer contribution would be taken from his 15% pension allowance. PO S CONCLUSIONS The PO noted that, whilst it would have been unforeseeable at the time, allowing transferred employees to take any amount between 0% and 15% as cash paid alongside their salary could create an issue with automatic enrolment. An employee who chose a 15% cash allowance (as the Applicant had done) could effectively have a windfall gain if they were allowed to receive the full 15% cash plus the employer pension contribution required by the automatic enrolment legislation. The PO upheld the complaint but it is important to note that he did not think that the employer should be asked to pay additional sums to the Applicant s pension. Ultimately the 1% employer contribution could therefore be deducted from the 15% pension allowance, but the problem in this case is with the way that the employer dealt with what amounted to a change of the contractual arrangement. The PO stated that the employer should not have treated the Applicant like any other employee being automatically enrolled but rather should have formally explained to him that it was effectively being required by legislation to alter the contractual arrangement and discussed the options with him. The PO did not think that the employer could rely on a standardised automatic enrolment notice sent a week before the employer s staging date as a sufficient basis to alter the contractual arrangement without giving the Applicant the opportunity to fully understand and consider his options and make an informed choice. The PO noted that once the Applicant understands his options he may prefer to opt out and continue to receive 15% cash or may wish to remain automatically enrolled, in which case the employer can deduct the 1% from the 15% pension allowance. The PO stated that he was satisfied that putting these options to the Applicant does not constitute undue coercion not to be auto-enrolled. It is a matter of re-categorising pension contributions which were already contractually agreed and allowing the Applicant to decide how he wishes to allocate monies to a pension, if at all. Directions were made requiring the employer to ensure the Applicant is fully apprised of his options and to establish whether he wants to remain automatically enrolled. If he elects to opt out, the employer should reimburse with interest the 1% payments that have been taken from his allowance. The employer was also directed to pay the Applicant 500 in respect of distress and inconvenience. A key lesson from this case is that, when dealing with automatic enrolment (or re-enrolment), employers should consider whether there are any special contractual arrangements which may require additional communications and discussions with affected employees. The PO s comment that putting the options to the Applicant would not breach the prohibition on inducements is also notable. However, whether the inducement prohibition is breached will depend on the facts of each case and therefore we would suggest that employers seek advice if this could be an issue. 06 Pensions Ombudsman Round-Up March 2016
STATISTICS JANUARY NUMBER OF DETERMINATIONS 4 SCHEME TYPE Public service scheme 1 Private sector scheme 3 OUTCOME Upheld 2 Partly upheld 0 Not upheld 2 AWARDS FOR DISTRESS AND INCONVENIENCE* Lowest award 1,000 Highest award 1,000 FEBRUARY NUMBER OF DETERMINATIONS 4 SCHEME TYPE Public service scheme 3 Private sector scheme 1 OUTCOME Upheld 2 Partly upheld 1 Not upheld 1 AWARDS FOR DISTRESS AND INCONVENIENCE* Lowest award 500 Highest award 500 * For these purposes, awards are considered by looking at what is payable by a single respondent to a single applicant. There was only one case in January in which an award was made for distress and inconvenience, and therefore the same amount is recorded as the lowest and the highest award. www.dlapiper.com 07
CONTACT DETAILS Cathryn Everest Professional Support Lawyer, London T +44 (0)20 7153 7116 cathryn.everest@dlapiper.com David Wright Partner, Liverpool T +44 (0)151 237 4731 david.wright@dlapiper.com Vikki Massarano Partner, Leeds T +44 (0)113 369 2525 vikki.massarano@dlapiper.com Claire Bell Partner, Manchester T +44 (0)161 235 4551 claire.bell@dlapiper.com Ben Miller Partner, Liverpool T +44 (0)151 237 4749 ben.miller@dlapiper.com Tamara Calvert Partner, London T +44 (0)20 7796 6702 tamara.calvert@dlapiper.com Kate Payne Partner, Leeds T +44 (0)113 369 2635 kate.payne@dlapiper.com Michael Cowley Partner, London T +44 (0)20 7796 6565 michael.cowley@dlapiper.com Matthew Swynnerton Partner, London T +44 (0)20 7796 6143 matthew.swynnerton@dlapiper.com Jeremy Harris Partner, Manchester T +44 (0)161 235 4222 jeremy.harris@dlapiper.com 08 Pensions Ombudsman Round-Up March 2016
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