Advisory Service Forum:
A Question of Duty Over Rights
Are trustees, administrators and employers under a duty to advise scheme beneficiaries ?

by David Main of Rowe & Maw

This article considers whether there is a duty on trustees, administrators and employers to advise members in relation to their rights under pension schemes in the light of recent cases.

The nature of the duty

First, what does “a duty to advise” mean? There is distinction between a duty to provide information about the scheme, which certainly exists, and a duty to go beyond this and actually give advice about a member’s rights under the scheme.

There are extensive requirements to provide information to beneficiaries under a scheme contained in: the Occupational Pension Schemes (Disclosure of Information) Regulations, the Occupational Pension Schemes (Transfer Values) Regulations, the Occupational Pension Schemes (Winding Up) Regulations, the Pensions on Divorce (Pension Sharing) Regulations and the Employment Rights Act 1996 to name but a few. There is also, in the background, a trust law right to see trust documents.

Advice goes beyond the mere giving of information. It means suggesting a course of action to the member in relation to his or her scheme rights. It might, for example, relate to:

• whether to transfer benefits from one scheme to another
  
  
• when to retire
  
  
• which investment choices to make under a defined contribution arrangment
  
  
• whether to use additional voluntary contributions to buy added years’ service
  
  
• whether to commute pension on retiring.

Trustees and administrators

The courts have consistently held that trustees and administrators do not have to advise members about their rights under the scheme or warn members of the risks of a particular course of action. This is illustrated by Wirral Borough Council v Evans (8 November 2000).

Mr Evans worked for BT for 19 years and was a member of the BT scheme for that period. He then left to work for John Moores University and joined the Local Government Pension Scheme. When he joined, he was given a scheme booklet and a supplemental pamphlet. Mr Evans requested information from the BT scheme about his accrued rights and was informed that his pensionable service under the scheme was 19 years and 90 days. He requested that a transfer payment be made to the Local Government scheme.

Once the transfer had been made, the administrator of the Local Government scheme wrote to Mr Evans to tell him that the transfer payment purchased 9 years 162 days’ “reckonable service” and 9 years 294 days’ “additional qualifying service” under the scheme. He queried the distinction in a telephone call to the administrators and appears to have been given the impression that for the purpose of calculating his benefits these two figures would be added together (the Ombudsman did not make a finding of fact as to the content of the conversation).

Unfortunately for Mr Evans, only reckonable service counted in the calculation of his benefits. This was not entirely clear from the booklet or the pamphlet he had been given. The result of the transfer, therefore, was that his credited service under the Local Government scheme for the purpose of calculating benefits was 9 years 162 days, as opposed to the 19 years or more that he was expecting. Mr Evans complained to the Ombudsman who found in his favour and the Council appealed to the High Court.

The court distilled the complaint down to whether the administrator was under a duty to explain to Mr Evans the difference between the two types of service and so demonstrate to him the apparently disadvantageous terms on which the transfer would be made.

The court held that there was no initial duty on the administrator to give the advice which would have deterred Mr Evans from making the transfer on such unfavourable terms. However, if the administrator had given Mr Evans advice in the telephone conversation, it would have assumed a duty to advise him competently and this duty might have been breached. As the Ombudsman did not deal in his determination with the contents of the telephone conversation, the court remitted the case back to him on this point. The important point to note is that actually giving advice might give rise to a duty to give that advice properly.

Employers

As is the case with trustees and administrators, the courts have held that there is no duty on employers to advise members about their pension rights, although the courts have come closer to imposing such a duty in very limited circumstances. University of Nottingham v Eyett (13 November 1998) and Scally v Southern Health and Social Services Board (23 October 1991) show the extent of the employer's duty.

In the University of Nottingham case, Mr Eyett was entitled to take early retirement. He was provided with information about his benefits assuming retirement on 31 July 1994. That information was based on his pensionable salary on 1 August in each of the previous three years. The university did not inform him that if he were to wait until 31 August 1994, his benefits would be higher because his final pensionable salary would take account of the pay rise on 1 August 1994 which was announced and backdated to April 1994. Mr Eyett complained to the Ombudsman who found in his favour. The university appealed to the High Court. The question before the court was whether the university failed in its duty to Mr Eyett by not telling him that he would be better off by delaying his retirement.

The court held that the university could only be liable if it had breached the duty of good faith and confidence implied into Mr Eyett’s employment contract. Mr Eyett was aware of his benefits and he had a copy of the scheme booklet from which he could have worked out the advantage of waiting a further month before retiring. He did not ask the university for any advice as to the suitability of his choice of retirement date and there was no evidence that the university knew that he was making his decision under the influence of any mistake. The court was not prepared to accept that the implied duty of good faith included an obligation to warn Mr Eyett that his decision to retire a month earlier might be a financial mistake.

The decision in Scally represents the closest that the courts have come to deciding that there is a duty on an employer to advise in relation to members’ benefits. The case concerned a group of junior doctors who were members of the National Health Service scheme. Unknown to them, they had the right to purchase added years’ service on beneficial terms to enable them to obtain maximum pensions, but the right had to be exercised within a short time limit or else it could only be exercised afterwards on much less beneficial terms. Clearly, the right was of no use to the doctors unless they knew about it.

What is unusual in this case is that the right was contained in a collective agreement that had been negotiated by the doctors’ representative body. Ordinarily, employees would not get to see the agreement and there was no reasonable way that the doctors could be expected to know of the right without it being pointed out to them. The House of Lords decided that in this case, it was appropriate to imply a term into the doctors' employment contracts that the employer would take reasonable steps to bring the existence of the right to their attention. What the court did not say was that the employer had to give advice about the exercise of the right. Because of the unusual nature of the employment relationship in Scally, its application is limited to cases with similar facts.

The conclusion from the cases is that beyond the duty to give information about the scheme, there is no general duty to advise members about their rights under the scheme, how to exercise those rights or to point out errors in the exercise of those rights.

Good practice

The strict legal position is not the end of the story, however. Enter the Pensions Ombudsman. If the employer and the trustees/administrator do not follow good practice, the Ombudsman may find that there has been maladministration in the failure to give basic advice even if the strict legal position is that there was no duty to give it. Alternatively, he may try to find a material difference between the facts of the complaint before him and the facts of cases that have been considered by the courts so as to justify not applying the principles set out in the cases, leaving him free to arrive at a finding of maladministration.

What would constitute good practice?

1. Clarity
It almost goes without saying that scheme literature should be clear as well as correct.

There are numerous illustrations in the cases and in the Ombudsman’s determinations where scheme literature was not clear. For example, an explanation of the difference between “reckonable service” and “qualifying service” in the Local Government scheme literature might have prevented Mr Evans' complaint.

This year, the Ombudsman has made two determinations in cases where the employer terminated a final salary scheme and provided a replacement money purchase arrangement. In these cases, the members bringing the complaints were told that the purpose of the money purchase replacement was to provide “a target pension of 8/60th of final salary” or “the same level of pension as under” the final salary scheme, without making it clear that the amount of the pension would depend upon contributions and investment return. In both cases the Ombudsman directed the employer to make a contribution to the money purchase replacement to provide the equivalent of the final salary benefits that would otherwise have been provided (See Mrs P L Simmons K00158 and Mr A E Garwood K00326).

The Ombudsman has also determined elsewhere that the provision of inaccurate or misleading information is clearly maladministration. Writing scheme literature in “plain English” may go a long way towards preventing these types of complaint.

2. Comprehensiveness
Scheme literature should also be comprehensive.

The reasoning behind the courts’ decisions seems to be that if there is proper provision of information, the member will be in a position to know what his rights are and to make an informed decision over the exercise or non-exercise of those rights for himself. This should help to reduce the risk of a claim that advice should have been given. In the University of Nottingham case, Mr Eyett’s mistake could have been avoided if a standardised procedure for explaining the effect of choosing a retirement date on one side or other of 1 August in a particular year had been in place.

3. Suggest taking advice
Where information is provided, it is sensible to explain clearly that the information does not constitute advice or a recommendation. It may also be appropriate to suggest that the member takes independent financial advice before exercising any rights under the scheme.
This might be stating the obvious but it is increasingly important to remember given the trend towards defined contribution arrangements which offer a wide range of investment choices, not all of which will be suitable for every member. There is unlikely to be a duty to advise about such choices but the issue has not been tested yet. In the US case of Unisys (1999), the Plan did not tell members the insurer was financially unsound, although they got the executives out of their policies with the insurer. The court said the company was not under a duty to tell the members because the information was publicly available.

Where do you draw the line? At least one judge in the UK has said that it is “good practice” for trustees to give advice to members (see Miller v Stapleton (1996)) and we may see a growing expectation that trustees will give advice about investment choices. Beware however: members will be unforgiving if, in their eyes, they rely upon information from the scheme to make their investment choices, and the return on their money purchase accounts is poor.

4. Don't give advice
Employers, administrators and trustees should consider what is likely to constitute advice and how to recognise situations in which it might inadvertently be given.

This is particularly the case in relation to financial advice and advice about investment options. Adequate training and guidelines about what responses can be given, particularly over the telephone, should be put in place. The training would, for example, highlight that to give advice about specific investments the person giving the advice might need to be authorised under the Financial Services Act 1986. (Rights under occupational pension schemes are not “investments” regulated by the Act. If the trustees of a defined contribution pension scheme gave advice about which fund to invest in, would that go beyond the limited exception?)

The training would also need to highlight that one of the risks of giving advice is that, by doing so, the person giving the advice might assume a duty of care to the member. If that advice subsequently proves to be incorrect or negligent and the member suffers loss by relying on it, the person who gave the advice could be liable to make good the loss.

Finally, it should not be forgotten by trustees (or administrators to whom they have delegated their functions) that they are under a duty to consider the interests of members overall. Any advice that is given should not unduly favour one class of beneficiary to the detriment of another. An example of this would be forewarning a category of members of the date of commencement of winding-up so that they can retire early and be placed higher up in the order of priorities on winding-up. This could prejudice the funding of the scheme to the detriment of members lower down the order of priorities.

Conclusion

There is no duty to advise unless the employer, administrator or trustees assume responsibility for giving advice.
This may happen inadvertently. Although they will want to help members, they must exercise caution in anything “helpful” that they say to the member.
Claims by members that they should have been given advice can never be eliminated entirely, but through good practice employers, administrators and trustees can reduce the risk of claims succeeding.

David Main
Solicitor
Rowe & Maw
Tel 020 7248 4282
dmain@roweandmaw.co.uk