Ombudsman Determinations

Lewis (24376/1)
Member’s benefits “lost” and nobody to claim them from

The member left service in 1978, and was given a certificate of entitlement to a deferred pension. In 1983, his former employer was bought and scheme assets transferred to the buyer’s scheme. Revenue records showed the member as having a GMP entitlement under the new scheme, which was itself wound-up in 1990. However, the insurance company that bought out the benefits had no record of the member. In the absence of evidence that the benefits had been transferred out prior to wind-up, the Ombudsman found that the benefits remained as scheme liabilities, but were never secured on buy-out.

As it had not been possible to establish why the benefits were not bought out, the Ombudsman felt unable to conclude that the administrator was responsible. And while the Ombudsman thought the failure of the former trustees (now untraceable) to maintain records and pay the benefits would be maladministration: “there being no fund on which he could claim I would almost certainly have to find that the Trustees had acted dishonestly for them to be personally liable for his loss. There is no evidence to suggest this…Mr Lewis’ benefits have been lost and it is with great regret that I have to say that there is no-one who can now be blamed for that. There is no fund or other resource on which he can make a claim. Understandably Mr Lewis finds this difficult to accept. Nevertheless I am unable to uphold his complaint.”

McPherson (73461/1, 75033/1)
Making proper enquiries where deviating from expression of wish

The member’s expression of wish asked for any lump sum arising on his death to be split between his two sons. However, the administrator paid 50% of the lump sum to the member’s wife, with the two sons receiving 25% each. The sons disputed the award, pointing out that the wife had received the benefits under the scheme’s retirement cash account, as well as £240,000 as her share of the estate. The administrator did not give its reasons.

The Ombudsman said that as a conscious decision had been made to ignore the member’s expression of wish (presumably to give more weight to the circumstances of potential beneficiaries at the time of death, nine years later) then it was necessary for the administrator to obtain all relevant information and not simply to act on confirmation that the wife was dependent without establishing to what extent, or enquiring as to the financial circumstances of the sons. The failure to take all material factors into account meant the decision could not stand. The administrator was ordered to reconsider the decision, and to give reasons this time.

Riddell (72726/1)
No interest payable as of right on late payment

Following a part-timer claim a tribunal declared that the member was entitled to retrospective scheme membership from 1984 to 1997. The member agreed her chosen option for taking benefits in January 2008 and her pension and lump sum came into payment in June. The member complained at the lack of payment of interest on the benefits since 1997.

The employer said that any decision to pay interest was subject to scheme rules, which were silent on payment of interest in these circumstances. The Deputy Ombudsman said that “in the absence of maladministration resulting in the late admission, and there being no express provision within the Scheme rules, I cannot see that it would be appropriate for me to direct the payment of interest.”

He went on to consider whether there was any general legal entitlement to payment of interest. He cited case law which said that interest might be available under statute or equity but “the general rule of English common law is that the court has no power, in the absence of any agreement, to award interest as compensation for the late payment of a debt or damages.” The Deputy Ombudsman also took into account the fact that the scheme had not looked to the member for the payment of interest on the arrears of her contributions. No interest was therefore payable.

Warwick (71590/1)
Trustee’s conflict did not invalidate distribution of death benefit between trustee and complainant

The member contested the distribution of the death benefits of her partner between herself and his ex-wife, who was also a trustee of the scheme. The member said that the ex-wife could not act fairly in her trustee role given that she was a possible beneficiary of the death benefit.

The Ombudsman agreed that a member who was a trustee and, in this case, a potential beneficiary, has a potential conflict of interest, but noted that the rules of the scheme provided that potential conflict did not stop that member being involved in a decision. He held that even if there was a risk the member’s thinking was “tainted by irrelevant matters” – although he made no finding that was the case - that did not invalidate the decision made by the three trustees, who included an independent trustee, as a whole

Dallas (S00040)
Trustees cannot pre-empt outcome of fraud case

The retired member had signed a compromise agreement and paid an amount to his former employer

in relation to what the agreement described as a “conspiracy to defraud” the company. The company subsequently issued civil proceedings against the member and the trustees suspended payment of his pension, holding instalments in escrow pending the outcome of the litigation. The member complained that the withholding of pension amounted to a “charge, lien or set off” which, under the Pensions Act, can only be exercised following a decision of a court.

The trustees argued that the Act did not prevent the holding of pension instalments in escrow. The member had effectively admitted fraud by signing the compromise agreement. Indeed, the trustees considered it might be negligent to continue to pay the pension, which they might not otherwise be able to get back, pending the outcome of the civil action. The Ombudsman said that he had no jurisdiction to determine on the subject of the litigation. However, the trustees were acting in breach of the Pensions Act in holding the pension in escrow, as doing so amounted to a “lien” under the legislation and this was not permitted where the amount of the sum owed was in dispute. He directed the trustees to reinstate the member’s pension, and pay the instalments due with interest.

Peck (S00537)
Member bound by collectively bargained changes

The employer had balloted on a new reward package including pay rises but also introducing a non-pensionable element for contribution and benefit calculations. The union accepted the changes and the trustees agreed to the relevant rule amendments. The member subsequently complained about the imposition of the changes on him. He was not a union member and had not been able to vote, while the majority of union members who had agreed to the package were not actually scheme members. He said the trustees should not have agreed to the amendments.

The trustees had received legal advice that future service changes were primarily a matter between employer and employees, and obtained sign-off from a QC on the changes on the basis of the employer’s representations of the binding contractual effect of collective agreements to which contracts of employment were subject.

The Ombudsman noted that the South West Trains case showed that it was not improper for alterations to a pension scheme to be decided by collective bargaining: there was nothing inappropriate about union involvement in a scheme. In this case, the member’s own contract was not expressly subject to agreed collective bargaining. However, a term could be implied by custom or usage on the basis of previous dealings. The member had not previously objected to any collectively bargained terms, had continued in employment and had benefited from the pay rise that had been negotiated. This amounted to “acceptance by conduct” of the whole package.

Martin (72132/1)
Unfunded pension promise could not be withdrawn

The Ombudsman upheld complaints that the employer broke a pension promise, made in writing in 1998 by its former chairman and chief executive, that certain ex-employees would receive an inflation-proofed pension of £6,000 p.a. on retirement. The complainant had initially received the pension under a purported contract of employment, but a few years later the employer stopped the payments, claiming that it did not have appropriate authority to continue them.

The Ombudsman upheld the complaint on the basis that the initial promise had been appropriately authorised by the employer and amounted to an “occupational pension scheme” within the wide definition in the Pension Schemes Act. The promise persisted notwithstanding that its method of implementation – via the purported contract of employment – was, as the Ombudsman put it, “not entirely fit for purpose". He directed the employer to reinstate the pension, pay arrears with interest, and to pay the member £500 for the distress and inconvenience of having her pension abruptly stopped.

Kirby (73391/1)
Double glazing insulates member against claim for repayment

In January 2007 the member was quoted a lump sum entitlement of £9,600. A few days later, she arranged for double glazing to be fitted, signing a contract which compelled full payment of £3,500 on completion. In March her employer wrote to say that her correct annual pension and lump sum were half the amounts originally quoted, and that repayment of the overpaid lump sum was “now due”. In April, the work on her house was completed and she paid the money over to the window company.

The employer claimed that it was entitled to repayment in full, as the member paid out after being notified of the overpayment. However, the Ombudsman found that the member had decided to have the work done based on the mistaken original quote, and that by the time she was told of the mistake she was committed to full payment.

The employer could recover the amount of the overpaid lump sum only to the extent it exceeded the price of the double glazing, with instalments to be agreed with the member. The employer would also have to meet any tax arising by virtue of failure to recover the overpayment in full. In addition, it was directed to pay £200 by way of compensation for its maladministration.

Curran (74746/1)
Need to justify “unusual and explained” death benefit decision

At the time of the member’s death he was not living with his wife (who was living with a new partner) although she was the sole beneficiary in his will and they still had joint bank accounts. The couple had had five children, three of whom were in foster care, while two had been adopted. There was no death-in-service lump sum nomination form. The trustees decided to pay the death benefit to the five children in equal shares but did not record their reasoning.

The widow complained, saying that she should have received a share of the lump sum saying that without it she would lose the house she jointly owned with the member. The Ombudsman held that what evidence there was of the information that the trustees took into account suggested it was not adequate to make a proper decision. In particular, they did not appear to have asked the wife about her living arrangements, but had relied on statements from the member’s parents.

While the trustees’ decision was not impossible or automatically perverse, it could not be regarded as safe. “The outcome, which includes a payment to two children reportedly adopted as babies and with whom there had been no contact since, is unusual and unexplained.” The trustees were directed to reconsider the matter and to give the widow a reason for their new decision and an explanation of what had been taken into account.

Adams (M00358)
Trustees not dishonest but still personally liable for investment losses

Scheme members complained about failed investments made by the trustees in shares in employer companies, failure to reinvest encashed investments and the improperly unreduced transfer-out of the benefits of one trustee amounting to some 1/6 of the total assets of the scheme.

Although only one trustee, the chief executive of the company who had instigated the transactions, was found to have acted dishonestly, the Ombudsman found that the trustees generally had failed to carry out their fiduciary responsibilities. He said that section 33 of the Pensions Act 1995 precluded them from relying on the indemnity and exoneration clauses in the rules. Neither were they entitled to discretionary relief under the Trustee Act 1925, relief which required that they had acted “honestly and reasonably.” While there may not have been dishonesty, their decisions could not be said to be reasonable.

As a result, the trustees were each held jointly and severally liable for the loss caused to the scheme, which was determined as over £500,000 plus interest. The Ombudsman acknowledged that the trustees had limited resources, but said that: “In my judgment the interests of the body of innocent Scheme members (which I acknowledge includes the respondent Trustees) outweigh the personal interests of the Trustees, whom I have found at various parts of this Determination to have been at fault.”

Griffiths (R00682)
Member taking statement on “protection” of pension too literally

The member complained that a letter from the employer received on its going into administration had reassured him that the scheme was “protected by law”. In fact, the member would only be receiving Pension Protection Fund compensation. He argued that “protected by law” led him to expect his full scheme entitlement. The Deputy Ombudsman dismissed the complaint on the basis that the member’s interpretation was unreasonable: “To say that “qualified pension plans are protected by law” when a company goes into administration is true, insofar as the assets of the pension scheme cannot be accessed by the company’s creditors. Mr Griffiths, however, appears to have read this statement as meaning that there would be no affect [sic] on the Scheme’s ability to pay the members’ accrued benefits in full.”

The statement could not readily carry the meaning the member wished to ascribe to it, nor was it untrue or implied any intention on the part of the employer to mislead members. It was also relevant that the member had not sought clarification or confirmation for his under-standing from any source.

Cook (71468/1)
Statement of intent was not a guarantee

The member had received a letter from the insurer saying that his terminal bonus was not guaranteed, and could be withdrawn at any time. However, the letter went on to say that the insurer had “no plans to cut or remove such bonuses”. When the insurer decided, three months later, to reduce its terminal bonus rates after all, the member claimed the letter represented a legally binding commitment in reliance on which he had purchased double glazing and electrical appliances based on the pension he expected to receive.

The Ombudsman said while the insurer’s letter was “perhaps over confident”, it could not be read as a guarantee. He also noted that the pension ultimately payable would also have depended on investment performance and the annuity rates offered: “Even if Mr Cook had thought that bonuses were guaranteed, he has not suggested that he thought annuity rates were guaranteed as well”.

Williams (73307/1)
Incapacity: how to take future treatment into account

The member complained that the trustees had not granted him a total incapacity pension. The test in the scheme rules was “ill-health which in the opinion of the Trustees is sufficiently serious to permanently prevent a Member from undertaking any paid employment with any employer or self-employment.” The trustees’ medical practitioner had said that, taking into account proposed treatment, there was no reason the member should not return to gainful employment. He also observed that it would be premature, and not in the member’s best interests, to suggest that he would not be able to do so.

The Ombudsman said that the medical practitioner had applied the wrong test. The trustees had to reach a decision on the balance of probabilities and the proper way to take into account any future treatment was to decide whether the member’s incapacity would be permanent without future treatment and, if so, to consider whether future treatment was likely to alter that.

“The question was merely whether on the balance of probabilities the treatment would or would not be effective”.

The trustees had also taken an irrelevant factor into account. Whether having a pension awarded was in the member’s best interests was not material to the test the medical practitioner was being asked to consider under the rules. The trustees should reconsider the decision.

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

msg@cmck.com
www.law-now.com

 

Mark Grant

Partner
Pensions Ombudsman Unit
CMS Cameron McKenna

msg@cmck.com
www.law-now.com