OPDU Report 26 October 2009

Bulletin Board
Claims Report - A round up of OPDU’s claims experience in the last year

Lessons to be learned?

It is surely every trustee’s worst nightmare to face a claim.  With that in mind, we thought it would be useful to highlight some of the themes emerging from our claims experience over the last year...

Amendments to scheme documentation

When making changes to scheme benefits, the effect of a failure to correctly amend documentation can have serious consequences. 

By way of example, in a case where the contractual documentation between the member and the scheme was amended, but the Trust Deed was not, the intended equalisation of benefits to age 65 was ineffective.  This meant that the scheme was obliged to pay benefits to members from age 60.  The error did not come to light for several years with the effect that the scheme unexpectedly found itself facing an additional liability to its members in excess of £1 million.

Where such errors emerge, the scheme will, understandably, be anxious to seek compensation for its additional liabilities from the person/entity responsible for the error. 

More often than not, the trustees will have appointed lawyers and actuaries to implement scheme changes and will have relied on the advice of these properly appointed advisors.  Provided that the Scheme/Trustee opted for Third Party Service Provider Pursuit Cover with OPDU, the scheme can be indemnified for legal costs incurred pursuing a claim against these advisors. 

In another notification involving the implementation of equalised benefits, the drafting of trust documentation was unclear and gave rise to two conflicting interpretations. On one interpretation, the scheme would have faced an additional liability of around £15 million to its members.  Although there was no question in this instance of any wrongdoing by the trustee, the scheme had to incur significant legal costs negotiating with its members and entering into a court approved agreement.  This case clearly illustrates the significant cost liabilities that trustees can be exposed to, even in circumstances where no actual claim has been intimated.  Such costs could, however, be covered by OPDU’s Court Application Costs Extension cover (an optional add on).  

Early retirement requests

Early retirement requests frequently give rise to complaints by members that the trustees have exercised their discretion improperly. However, recent claims experience suggests that, where the trustees consistently approve such requests, members are more likely to believe that the ‘request’ is in fact a mere formality.  This problem has reared its head more frequently recently as harsh economic conditions (and large-scale redundancies) have meant that trustees have been more likely to refuse early retirement requests.

Although the trust deed may make it absolutely clear that such requests are within the trustees’ discretion, that does not of course prevent a member from complaining to the trustees using the Internal Dispute Resolution Procedure (“IDRP”) and, if that is unsuccessful, to the Pensions Ombudsman.  Whatever the merits, the members’ complaints can be time-consuming and expensive to defend.

Investment loss

Perhaps unsurprisingly in the current economic climate, we have seen a number of notifications involving an allegation of “investment loss” against trustees. 

Whereas in previous years, a delay of a couple of weeks by the trustees and/or administrator in transferring funds out of a scheme may not have given a member any particular cause for concern,  those same delays against a backdrop of dramatic falls in share prices can have far more serious consequences.

Calculation errors

A continuing theme in our claims experience, both in past and current years, has been calculation errors.

In terms of over-payments or over-quotations of benefits, a member is only entitled to compensation if he/she can demonstrate that there has been reliance on the error.  Claims by members that they have relied on incorrect quotations to their detriment are common. The member will often seek to argue that he/she would not (for example) have taken early retirement were it not for the over-quotation and that he/she should be paid the benefits as quoted on the incorrect statement.  There is often a small additional claim for distress and inconvenience. 

In the case of over-payments, it may not be practical or possible for the trustees to recoup the over-paid benefits from the member.  This can result in the Scheme suffering a loss.

In terms of under-payments, the trustees are under an obligation to correct the error both retrospectively and going forward.  Whilst this might not necessarily give rise to a claim against the trustees, the errors themselves can still be extremely time-consuming to correct.  This is particularly the case where the errors go back many years (15 years is not unusual in our experience). Where the errors originate from the administrator, there may be a

meritorious claim against the administrator for losses suffered. The employer and/or the trustees should consider whether or not they wish to take out Third Party Service Provider Extension with OPDU to protect themselves against such an eventuality.

Whilst it is never possible to eliminate the possibility of a claim entirely, we hope that the above assists in illustrating the areas which are the most common issues presently giving rise to problems for trustees. Trustees should consider carefully whether the insurance cover they have is suitable for their requirements, being particularly mindful of the costs that can be incurred even in circumstances where there is no actual claim against them.

Claims Report

Some typical examples of the subject matter of claims in which we have been involved are as follows:

• Incorrect formulas used for calculating benefits n Interpretation of Trust Deeds
• Overpayment of Benefits
• Misapplication of Scheme Rules
• Seeking Court Directions n Early retirement & ill-health disputes
• Rectification proceedings
• Accounting irregularities n DC choices of investment funds
• Pension Sharing Orders n General administration errors
• TUPE issues n Misrepresentations by trustees
• Transfer Values
• Incorrect quotations
•  Discrepancies between scheme documentation and administration practice
• Delays in transfer and payments of benefit assets

The issues have involved individual claim sums ranging up to £20m to date. Experience demonstrates the importance of the accuracy of data and we recommend trustees ensure that regular data health checks are undertaken.