OPDU Report 24 - May 2008

Advisory Service Forum
Ombudsman Determinations
Mark Grant

Thomson (S00068)

No general duty on employer to warn that funding depends on employer’s continued participation
The member’s benefits were being cut back, due to scheme under-funding on a wind-up with an insolvent employer. The complaint, as the Deputy Ombudsman put it, was whether anything specifically required “members to be told, in so many words, that a scheme’s funding depends on the sponsoring employer’s continued participation.” After examining relevant case law, the Deputy Ombudsman noted that the courts have stopped short of finding a general duty on an employer to take reasonable care of an employee’s “economic well-being” (as opposed to where an employer has assumed responsibility for giving financial advice). He also noted that the cases had relied upon the existence of an employment contract, but by the time the member was contemplating taking his pension, he was no longer an employee.

In any case, the Deputy Ombudsman was doubtful that any duty of care would extend to providing Mr Thomson with an unsolicited warning that the employer’s continued sponsorship of the scheme was not guaranteed. “Even if it had, there could be no requirement to issue a warning as to unforeseeable events, such as the change in legislation relating to the priority order.”

Seymour (Q00857)

Issues arising where member realises implications of a switch to DC
The member complained that he had been improperly encouraged, in 1997, to transfer his funds from a scheme’s DB section to its newly set up DC section. The Deputy Ombudsman held that while some of the company’s literature “could be viewed as unduly enthusiastic about the DC section”, it was clear that overall the literature was detailed, balanced and made potential risks clear. It also offered access to independent financial advice, which the member had taken up at the time. The complaint was therefore not upheld.

However, the Deputy Ombudsman took a broad view of his powers to admit complaints “out of time”, saying that although the switch was made in 1997, the member had only become aware of possible grounds for complaint following statements in a 2004 pension newsletter, together with “subsequent media coverage”. He would therefore use his discretion to accept the application, as it was reasonable in these circumstances for it not to have been made sooner: “Until Mr Seymour became aware of the consequences of having switched he had no reason to complain”.

Mr X (Q00750)

Alcohol and drug abuse capable of being properly regarded as “ill-health”
The rules provided that ill-health pension could be reduced or reviewed where the member failed to produce such evidence of “continued ill-health” as the trustees might in their discretion require from time to time. The trustees decided to discontinue the member’s ill-health pension on the grounds that it was only the member’s abuse of prescription drugs and alcohol that prevented him being fit for work.

The Deputy Ombudsman noted that the trustees did not consider a self-imposed condition to fall within the definition of “ill-health”. However, he criticised them for having assumed that alcoholism was a matter of choice: “There can be no doubt that alcohol and prescription drug abuse are health related matters and I can see no evidence that proper regard has been had to whether such addictions are not in themselves “illnesses” which might therefore properly be regarded as “ill health” matters”.

In the absence of evidence that the trustees had properly considered whether these conditions amounted to ill-health, he directed that they re-consider the member’s application to have his ill health pension restored.

Robinson (S00495)

Relevance of untried treat-ments to ill-health claim
In this local government case, the scheme test for ill-health was that the member was permanently incapable of discharging the duties of her employment. The doctor com-missioned by the employer said that it was not possible to determine that she was permanently disabled, because there were untried treatments.

The Ombudsman said that it was not open to the doctor to say that he could not tell whether she was incapable, because she had not undertaken particular courses of treatment. If, in the absence of such treatment, the member was not permanently incapable, then the treatment was irrelevant. If she was incapable without treatment, the question was whether the treatment would, on the balance of probabilities, change that. What was relevant was whether the treatment was “available and recommended”. The decision was flawed, and would be remitted back to the employer.

Wood (R00411)

Deputy Ombudsman substitutes his interpretation of the “weight of evidence” in ill-health case
The Trustees, having considered a number of different (and conflicting) medical reports, denied the member’s application for an ill-health pension, on the basis that her condition had not been shown as likely to be permanent. While accepting that trustees could favour some opinions over others, the Deputy Ombudsman said that evidence had to be carefully weighed and he did not consider that the weight of evidence did in fact support the trustees’ decision.

Instead of remitting the decision for further consideration, the Deputy Ombudsman overturned it, and directed the trustees to pay the incapacity pension. He denied that this was substituting his opinion for that of the trustees, because the trustees were not exercising a discretion, but reaching a factual conclusion. He also criticised the trustees for not having taken into account a report commissioned for a different purpose (critical illness cover), for which the criteria differed from those under the Rules:

“A medical report does not always have to answer the question of eligibility for pension directly to, nevertheless, provide the decision maker with relevant information. It may require the decision maker to interpret the adviser’s comments in the light of the scheme rules in a more active way but this is the decision maker’s role. It is not the decision maker’s role simply to passively accept an opinion expressed by an adviser”.

Blades (P00310)

Failure to check life cover requirements for late entrant
The member joined his employer in 1993 but only decided to join its pension scheme in 2003. On 1 September 2003, he received a letter from the insurers confirming that his application had been accepted with effect from 18 September. On 10 September, the member collapsed and died at work. When the administrators submitted a claim for death-in-service benefit, the death benefit insurer wrote back to explain that because the member had not joined at the first opportunity, he was a late entrant under the Rules and his inclusion was therefore discretionary, as well as requiring submission of medical evidence. He was not therefore yet underwritten for life cover.

The Deputy Ombudsman held that the administrators should have acquainted themselves with the full terms and conditions of the scheme and that it was “inexcusable” for them not to have known that as the member was not joining at the first opportunity, he would not automatically be covered for life assurance. Their failure to start that process when he applied to join the pension scheme was maladministration. However, the Deputy Ombudsman accepted that even had they done so, the process would not have been completed before the member’s death, and that in any case the commencement of life cover could not have pre-dated 18 September. He was not satisfied that had the member known he was not covered by the scheme, he would have arranged life cover elsewhere before his death.

Stone (R00465)

Direction to reconsider death benefit award and to give reasons
The member died in 2005, aged 29. He left a wife, who he had married in 2004, and a 10-year old son from a previous relationship, who now lived with his mother abroad. The nomination form, apparently dating back to 1991, only mentioned the member’s parents, and there was no will. The trustees decided to split the death benefit lump sum equally between the widow and the son. The widow objected.

The Deputy Ombudsman said that it was a matter of good scheme administration that decision-makers provide reasons for their decisions, and that the lack of a record of the trustee’s discussions also made it more difficult for him to be sure of what their reasons were. He then noted a number of apparent deficiencies in the investigation by the trustees and was particularly concerned that only perfunctory enquiries had been made of the widow, and none at all of the child’s mother or (given that representations had been received that focussed on maintenance payments being paid by the member) the Child Support Agency: “I cannot be satisfied, from the limited evidence available to me, that the trustees obtained, and weighed, sufficient information to enable them properly to reach a decision”.

The decision would be remitted back to the trustees, who would, this time, “give full reasons” for it.

Bradley (R00373)

Operation of estoppel overrode entitlement under rules
The member complained that his deferred pension calculation only included basic salary and not the bonuses he had received while employed. Under the rules, bonuses were pensionable.

The Deputy Ombudsman considered the principle of “estoppel by convention”, citing the Amalgamated Investment case which held:
“If the parties to a contract, by their course of dealing, put a particular interpretation on the terms of it, on the faith of which each of them - to the knowledge of the other - acts and conducts their mutual affairs - they are bound by that interpretation just as much as if they had written it down as being a variation of the contract”.

He noted that various consultative sessions on restructuring of the employer’s business, and the documents produced for them, had made clear that the bonuses were intended to be non-pensionable. The member was a senior manager and would have received and read the communications. The Deputy Ombudsman therefore held that the member and employer proceeded at the time on an agreed assumption that bonuses were not pensionable, and it would be inequitable to allow the member’s pension entitlement to be based on the “strictly correct” position under the Rules.

Conway Belwell Williams (P01257)

Legal advice obtained by trustees from non-appointed adviser
The previous trustees of the scheme had, it appeared, relied on advice to the company from lawyers appointed by the company. This had stated, in relation to a proposed benefit augmentation:
“As advisor to the Company, I believe this is a proposal which the Trustees ought to find acceptable and that this proposal should be put forward to [the] Scheme Actuary and advisers to the Trustees”.

The newly appointed independent trustee pointed out that under section 47(3) of the Pensions Act 1995, if any person is “appointed otherwise than by the trustees or managers as legal adviser” then an offence is committed by a trustee who “places reliance on the skill or judgement of that person”. However, the Ombudsman trenchantly rejected any suggestion that the trustee had been in breach of trust by relying on the legal advice given to the Company:
“The Applicant’s argument seems in part to be that trustees cannot take account of any legal advice from any source other than a legal adviser appointed in accordance with Section 47 of the Pensions Act 1995. That is not what Section 47 says and would in any event be a nonsense. I have little doubt that many trustees, like me, are often sent gratuitous advice from law firms. Indeed many will attend conferences and seminars at which such general advice is given. Nor is there a specific duty on trustees to appoint a legal adviser.”

Howard (R00697)

Member can be compensated without identifying specific items of expenditure
In 2000, it had been incorrectly represented to the member that his scheme pension would not reduce when he reached state pension age in 2005. He claimed that he had relied on this incorrect quotation of benefits and that, had he known of the error, he would have gone to “more modest destinations” on holidays he had taken in the meantime, flying economy rather than first class.

Although the Ombudsman could not be satisfied that any particular flight or holiday could be shown to have been paid for in reliance on the error, he nevertheless decided that some award should be made: "I do not think he should not be compensated because it is impossible to identify any individual item of expenditure that would not have been undertaken”. The Ombudsman said that it would not have been unreasonable for the member to have spent 3 months’ worth of his future income in anticipation of its receipt, and therefore assessed his loss as £1,300.

The award made for distress and inconvenience was an additional £1,000 - a high award in Ombudsman terms. The Ombudsman acknowledged this, saying that for the member, who was also in ill-health, to become aware (in this case after five years) that his income after age 65 would not be increasing would have been “extremely distressing”.

Davies (N00770)

PO can look to “without prejudice” documentation when investigating maladministration
Following termination of the member’s employment, there had been various “without prejudice” discussions, offers and counter-offers between him and the employer. The employer argued that a number of documents now being relied on by the member in a claim of maladministration were privileged, as they had been part of these without prejudice negotiations, and had been produced in the course of genuine attempts to settle a dispute between the parties.

The Ombudsman rejected the employer’s argument. While accepting that the documents were made in the course of a genuine attempt to settle on a without prejudice basis, and that even that it would “defeat the common under-standing that existed between the parties... to place weight upon their contents now”, he held that it was still permissible to have regard to the existence and content of the documents, insofar as they were relevant to the member’s complaint (of a failure to provide him with certain information).
“The documents were not sent ‘without prejudice’ to the determination of such a complaint of maladministration”.

Mark Grant
Partner
Pensions Ombudsman Unit
CMS Camerom McKennal
Tel: 020 7367 3000

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