Protecting Trustees and Pension Schemes
The recent Court of Appeal case of Derby v Scottish Equitable plc (16 March 2001) is an example of how easily benefits may be overpaid and how difficult they may be to recover, particularly in terms of time and cost.
Mr Derby was made redundant in 1988. At that time he transferred an amount of £90,000 from his occupational pension scheme into a pension policy with Scottish Equitable. Mr Derby then decided to take early retirement in 1990 and received from Scottish Equitable a tax free lump sum and immediate pension. In 1995, Mr Derby enquired of Scottish Equitable what would happen to his pension when he became entitled to the state pension. Mr Derby told Scottish Equitable that he was already receiving an annuity from them. Scottish Equitable subsequently wrongly concluded however that Mr Derby was not in receipt of any early retirement benefit (their records were incorrect) and sent Mr Derby a statement showing his policy had a value of £201,938 (the correct amount was in fact £29,486). Mr Derby was apparently very pleasantly surprised!
In June 1995, Mr Derby received a cheque for £51,333 from Scottish Equitable and a further £150,604 was paid to Norwich Union for the payment for an annuity. Scottish Equitable discovered its mistake in October 1996 and requested Mr Derby to repay the money. Mr Derby refused to do so. Scottish Equitable then issued proceedings in the High Court and obtained an order against Mr Derby for repayment of all of the monies apart from the sum of £9,662 which had been spent by Mr Derby on modest improvements to his lifestyle. Mr Derby appealed to the Court of Appeal.
The Court first had to decide whether Mr Derby was genuine in not knowing a mistake had been made.
The Court accepted that Mr Derby had not known of Scottish Equitable's mistake. In particular, both Mr Derby and his financial adviser had made enquiries of Scottish Equitable once the incorrect statement was received in 1995 and both were assured it was correct.
The Court of Appeal then considered whether Scottish Equitable should be prevented from recovering the overpaid monies. If Scottish Equitable was "on inquiry" ie it had doubts about the correctness of what it was doing but decided to make the payment without considering the position further, it is likely Scottish Equitable would have been unable to recover any monies. The Court of Appeal held that although Scottish Equitable did take steps to investigate the matter, its investigation was inadequate, and therefore it did not in fact have adequate knowledge to put it on inquiry. Scottish Equitable were simply careless which gave it the prima facie right to recover the money.
The Court of Appeal then considered whether Mr Derby had "changed his position" to such an extent that it would be inequitable to require him to repay the monies, either in part or in full. Expenditure of the money in itself did not render repayment inequitable. The Court of Appeal decided the money invested in the Norwich Union policy, less the amount to which Mr Derby was properly entitled (£121,118) did have to be repaid as Norwich Union had agreed to unwind the policy. Of the lump sum, £41,671 was used to reduce the mortgage on the matrimonial home. The Court was not persuaded that by paying off his mortgage, Mr Derby had "changed his position" because the debt would have to have been paid off sooner or later in any event. Mr Derby was additionally ordered by the High Court to pay interest on these two amounts and the Court of Appeal did not overrule this point. It was recognised by the Court of Appeal that Mr Derby was "an impoverished elderly man entering upon retirement who, having initially taken the trouble to question the extent of his entitlement, is then left for sixteen months honestly believing in his good fortune". The Court contrasted Mr Derby's position with the "rich and incompetent insurance company who, despite Mr Derby's protestations, carelessly pays out £172,451 too much and then takes sixteen months to discover its mistake". However, the Court only allowed Mr Derby to retain £9,662 on the basis that he had only changed his position to that extent.
It must, as a matter of general principle, be right that depending upon the circumstances of the recipient of the overpaid benefits, where a mistake has been made, the overpayments should be recoverable. But how often should the mistakes be allowed to happen before the Court will put its foot down? It is interesting to compare this case with the Ombudsmans' decision (just before the High Court's decision in Scottish Equitable) concerning the London Borough of Redbridge (Ref: G00190). There, Redbridge Borough had overpaid Mr Fuller, and a number of other members, as a result of having inadequate checking procedures in place. There appears to have been no issue of the Borough being on inquiry at the time of overpayment, and it appears to have been, at most, extremely careless. Nevertheless, Mr Fuller was not obliged to repay the overpayment of approximately £100,000.
Contrast that decision with Mr Derby's case where Scottish Equitable initially failed to alter their records. Then an employee at Scottish Equitable discovered the mistake in December 1992 and sent an internal instruction to have the records altered, but this instruction was not carried out. Scottish Equitable still did not realise its mistake when told by Mr Derby in 1995 that he was already receiving an annuity. It is arguable that Scottish Equitable, on the basis that they made numerous mistakes, should have been placed on the same footing as Redbridge Borough, and been unable to recover any of the monies. It arguably should at least have been "on inquiry".
Turning to whether or not Mr Derby had changed his position so as to make it inequitable to recover the monies, Mr Derby's evidence was that he would not have repaid some of the mortgage had the overpayment not been made. As set out above, the Court said it would have had to have been paid off in any event. Would Mr Derby have realistically paid off this debt any earlier than he had to, given that he was close to living off the breadline at the time of the overpayment? Although he has benefited in terms of having to service a lower mortgage debt than otherwise, Mr Derby was ordered to repay a lump sum to Scottish Equitable. It was recognised that Mr Derby would effectively have to sell the house so as to realise the increased equity to be able to repay Scottish Equitable. As the house was to be sold soon in any event (given Mr Derby's marriage break-up) this was apparently no real hardship! What about the pressure to achieve a quick sale given the judgment looming over Mr Derby's head?
It is questionable whether the Ombudsman would have taken the same approach on this issue. The Ombudsman said in Redbridge that he was satisfied Mr Fuller had changed his position in any event by, amongst other things, purchasing a property. No mention was made of Mr Fuller selling the property and repaying the proceeds.
Then there is the question of interest. Mr Derby was ordered by the High Court to pay interest at 1% over base rate from October 1996 being the date when Scottish Equitable demanded repayment from Mr Derby. This amounted, at the date of the High Court's judgment, to £35,854.64. The Court of Appeal made no reference to this point and it is likely Scottish Equitable will in fact claim additional interest up to the date of payment by Mr Derby. The order to pay interest appears to be extremely unfair given the continued incompetence on Scottish Equitable's part. Further, although Mr Derby presumably benefited from the overpayment to a limited extent by saving interest on his mortgage, it is unclear whether any benefit he received from the Norwich Union policy would have equalled the amount Mr Derby was ordered to repay in interest. In addition, the Court of Appeal stated that without the co-operation of Norwich Union in unwinding the pension policy, Mr Derby could not possibly have repaid those monies. Yet interest started running from October 1996 even though Norwich Union did not agree until June 1998 at the earliest to unwind the policy. That is, in itself, wholly inequitable.
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