Pensions Ombudsman update

Pensions Ombudsman update May 2014 October 2014 Date Event Summary and Impact Pensions Ombudsman: Ill health early retirement 14 May 2014 Ill health early retirement: medical expert should have identified untried treatments Jardine (PO-2465) The Deputy Pensions Ombudsman has held that a decision-maker committed maladministration where it based its decision to refuse an application for ill-health early retirement (IHER) pension on an incomplete and insufficient medical report prepared by a registered medical practitioner. Mr Jardine was a member of the BT Pension Scheme (the Scheme). The Scheme Rules provided that in order to qualify for an IHER pension, a member had to be suffering from incapacity. The Scheme Rules also required the Trustees to obtain evidence from a registered medical practitioner that the member would continue to be "incapable of carrying on the Member's occupation because of physical or mental impairment". Mr Jardine suffered from depression and went on long-term sick leave. His employment was terminated in December 2004 on the grounds of incapacity. BT obtained medical evidence from two registered medical practitioners in June and November 2004 and subsequently rejected his application for an IHER pension on the basis that he suffered from a condition from which people normally improve. Mr Jardine complained to the Ombudsman and BT complied with the investigator's decision that BT should reconsider Mr Jardine's application by obtaining a review of the medical evidence submitted at the time of Mr Jardine's application. This was carried out by Dr Sheard in July 2010. Dr Sheard found that the report prepared by BT's medical practitioner in 2004 showed that none of the treatments recommended by a specialist psychiatrist in 2003 had been tried out. Without this, his ill health could not be said to be permanent. On this basis, BT again decided to refuse to award Mr Jardine an IHER and Mr Jardine complained to the Ombudsman's office that BT's decision was wrong. The Deputy Ombudsman upheld the complaint that the member should not have been refused an IHER pension on the basis that his condition was not permanent as there were other treatments available for him to try. Dr Sheard based his decision on a report that was missing important information because it did not contain sufficient detail about the treatments tried or any rationale for the change in prognosis since May 2004. Dr Sheard's report should have concluded that further evidence was needed before a decision could be made on whether the IHER pension criteria had not been met. BT was responsible for ensuring that the investigation into Mr Jardine's

Pensions Ombudsman: Early retirement terms medical condition was conducted properly. BT should have checked that Dr Sheard had all the relevant information before deciding whether Mr Jardine met the IHER pension criteria. BT was ordered to ask Dr Sheard to obtain the missing information and reconsider whether Mr Jardine met the IHER criteria in December 2004. BT also had to review its IHER pension decision and pay Mr Jardine 250 for the inconvenience and distress caused by the maladministration. Impact: It is not sufficient for providers of IHER pensions to rely on incomplete or vague medical reports given by medical practitioners when assessing whether members meet IHER pension criteria. Decision makers should take this into account when assessing medical evidence and ensure that extra clarity is sought from the medical expert if necessary, before making a decision on whether the member meets the IHER pension criteria. 27 May 2014 Early retirement terms: misquotation did not vary a contract of employment Fokerd (PO-2991) The Pensions Ombudsman held that a member did not have a contractual right to more generous pension increases than those applied under the Scheme Rules, despite the fact that this benefit was provided to him in an early retirement quotation. Mr Fokerd was a member of the Scottish & Newcastle Pension Plan (the Scheme), whose principal employer was taken over by Heineken UK Limited in 2008. The Scheme Rules provided that pensions attributable to service after 6 April 1997 must be increased in line with the Retail Price Index (RPI) up to a maximum of 5% (5% LPI). The 1999 members' letter also provided that it was the employer's intentions to continue to pay the increases to its pre April 1997 members as it had done in the past. The employer notified Mr Fokerd in early 1999 that he would be made redundant on 30 April 1999 and in addition to his redundancy terms, offered him voluntary early retirement under the Scheme. He was given a redundancy statement (Statement) by the employer, which contradicted the Scheme Rules in stating that 5% LPI increases would be applied annually to his entire annual pension. Mr Fokerd accepted the offer of early retirement and received 5% LPI increases on his entire pension in excess of the guaranteed minimum pension (GMP), until 2010. However, in 2010 he was told that the employer decided not to award any discretionary increases to pensions earned before 6 April 1997. Mr Fokerd complained to the Ombudsman that he was contractually entitled to the yearly 5% increase set out in the Statement because he had relied on those increases when he accepted the offer of voluntary retirement. He then sold his house and ended his career in 2000. As a result of selling his house in 2000, he argued he suffered a significant loss because the value of his home had increased considerably since then. The Ombudsman partially upheld his complaint on the basis that the incorrect retirement quotation in the Statement was maladministration by the Trustee and the employer (as administrators of the Scheme). However, Mr Fokerd failed to provide evidence to satisfy the Ombudsman that he suffered an actual financial loss as a direct consequence of the maladministration. The

loss Mr Fokerd claimed to have suffered was not reasonably foreseeable. Furthermore, the Ombudsman held that it was not likely that Mr Fokerd would have decided not to take early retirement had he been properly informed of the employer's decision. Heineken UK and the Trustee were instructed by the Ombudsman to each pay Mr Fokerd 500 for the distress and inconvenience he suffered in discovering he would not be paid the expected increases. Impact: Early retirement pensions payable on redundancy are usually highly favourable benefits for employees; however, contractual promises to make payments above the normal scheme benefits are not common. It is therefore important that employers and trustees clarify to members the benefits payable from their scheme. Specifically, they should ensure that the employee is clear on the technical details of the scheme, such as the length of pensionable service and the rights to pension increases. The Ombudsman may make a finding of maladministration and an award of damages for distress if a member can show inaccurate or misleading communications (even if this evidence is not strong enough to entitle him to the claimed level of benefits). Pensions Ombudsman: Death benefits and payment of a spouse's pension 18 June 2014 Death benefits: trustees wrongly refused to pay spouse's pension to unmarried partner Siegfried (PO-1427) The Deputy Pensions Ombudsman has upheld a complaint by the unmarried partner of a deceased member on the basis that in deciding to only pay a dependant's pension to the deceased member's two children, the Trustees did not obtain any evidence concerning the complainant's assumed lack of financial dependency. Mr Jackett was a deferred member of the Credit Industriel et Commercial (London Branch) Retirement Benefits Scheme (the Scheme). Miss Siegfried was his long-term partner with whom he had two children. He had nominated the children to receive any Scheme benefits if he died. Mr Jackett died in September 2008. Scheme rule 22 stated that if a deferred member died, a spouse's pension was payable to any person to whom the member was married when he died. Should there be no spouse, then the Trustees had discretion to pay a dependant's pension to one or more persons who they were satisfied were partially or wholly financially dependent upon that member immediately before his death. If no spouse or dependant's pension was payable, the Trustees had the discretion to refund the contributions to one or more of the potential beneficiaries stated in rule 25. This included financial dependants, the member's siblings and persons nominated by the member to receive death benefits. The Trustees paid a refund of contributions to Miss Siegfried in January 2011. In May 2011, she queried whether any dependant's pension was payable either to her or their two children. In considering the definition of "dependant" under rule 22, the Trustees were "fairly sure" that Miss Siegfried did not qualify as a dependant. They therefore awarded each of the two children dependant's pensions. Miss Siegfried's appeal failed under the Scheme's internal dispute resolution procedure (IDRP). She therefore complained to the Ombudsman that the Trustees had wrongly decided to refuse to award her a dependant's pension. The Deputy Ombudsman upheld the complaint. The Trustees did not consider if a dependant's pension was payable to anyone else before they decided to refund the contributions to Miss Siegfried. They only refunded the member's

contributions to Miss Siegfried without considering whether she was a "potential beneficiary" for this benefit. This was maladministration. The Trustees made their decision without any evidence to support their conclusion that they were only "fairly sure" that Miss Siegfried was not financially dependent on Mr Jackett. The Trustees were ordered to make reasonable enquiries to establish Miss Siegfried's financial position before making a fresh decision. They also had to pay her 750 for the inconvenience and distress caused to her by the Trustees' failings. Impact: This case serves as a guide to Trustees on how not to handle the exercise of their discretion when awarding death benefits. Whilst each case will turn on its own facts, Trustees should not make assumptions on a deceased member's situation without obtaining sufficient supporting evidence. Trustees should collect evidence, which they should evaluate and use to reach a decision, taking into account only the relevant factors in the circumstances (and disregarding any irrelevant factors). Pensions Ombudsman: Misrepresentation of normal pension age 20 June 2014 Scheme administration: trustee estopped from increasing a member's normal pension age after misrepresentation McClean (PO-2382) The Deputy Pensions Ombudsman held a Trustee who wrongly informed a member that his normal pension age (NPA) was 62 and not 65, should be estopped from going back on his representation. The Deputy Ombudsman upheld the complaint where the member took his pension at 62 on the basis of this information. Mr McClean was a member of the Sequence (UK) Ltd (South) Staff Pension Scheme (the Scheme). During September 2010, the administrators of the Scheme wrote to Mr McClean to inform him that he would soon be reaching the NPA of 62. Mr McClean stated that he was surprised that his NPA was 62 and not 65 and that he intended to work until the age of 65. However, Mr McClean retired in November 2010 at the age of 62. He received a tax-free lump sum of 37,058 and a yearly pension of 5,558 (equivalent to 7,046 without commutation). In November 2011, the Scheme Trustee informed him that his NPA was in fact 65 and that 62 had been wrongly used as a result of an invalid rule amendment. The Trustee then cut his yearly pension, from December 2011 onwards, to 4,726 being the level that it should have been set at to reflect early payment. Mr McClean complained to the Ombudsman that the Trustee should be estopped from going back on his representation; or in the alternative, that the mistaken information constituted a negligent misrepresentation or misstatement. Mr McClean said that he had continued to work until he was 65, with his wife retiring only a few months before him. He used the monthly sum to pay for his son's university accommodation, which his bank statements showed he was committed to do before hearing of the reduction in his NPA. The Deputy Ombudsman upheld the complaint against the Trustee because the information given by the administrator on behalf of the Trustee was an unequivocal representation that the NPA was 62. It was reasonably foreseeable that Mr McClean would rely on it because there was little for him to gain by delaying taking his pension. He therefore relied on the statement, and despite deriving some benefit from receiving his pension and lump sum early, the fact that he then received a lower pension from retiring at 62 outweighed this. As a result, it was unconscionable to allow the Trustee to go

back on the representations and Mr McClean's remedy was to continue to receive the pension he was expecting to see. Whilst Mr McClean should have had to pay back the lump sum and monthly overpayments on the basis of the law of negligent misstatement, Mr McClean could not afford to do this, and the Deputy Ombudsman held that this would be inappropriate. The Trustee was ordered to pay Mr McClean's future pension calculated with an NPA of 62 and to repay him any shortfall from the pension he received from December 2011, with interest. He was also awarded 150 for the inconvenience caused by the Trustee's maladministration. Impact: It is usually difficult for members to make successful claims based on estoppel because the result can be that they end up receiving more then they are technically entitled to receive under the Scheme Rules. In this case, however, the member was able to prove a sufficient degree of detrimental reliance. Trustees and administrators should therefore note that they should conduct a full investigation of the circumstances surrounding an apparent error or overpayment before they attempt to reduce a member's pension. Pension Ombudsman: Pension increases and "reasonable expectation" 1 July 2014 Member citing IBM case had no reasonable expectation of discretionary increases Thomson (PO-1203) The Deputy Pensions Ombudsman has given her determination in a complaint by Mr William Thomson against GEH Holdings, and International General Electric USA (together, the Company) and GE Pension Trustees Ltd. Distinguishing the facts in IBM UK Holdings Ltd and another v Dalgleish and others [2014] EWHC 980 (Ch) (IBM), she dismissed a pension member's complaint. Mr Thomson was employed by the Company and was a member and former trustee of the GE Pension Plan (the Plan), as well as a member of the "topup" arrangement, the GE Supplementary Pension Scheme (the Scheme). The Company was the principal employer for both schemes and their trustee was GE Pension Trustees Ltd (the Trustee). The Plan rules allowed the Trustee, with the Employer's consent, to increase all or some of the pensions in payment attributable to pensionable service before 5 April 1997, to be reviewed at least once a year. This was also stated in the Scheme Rules, except that the Trustee had to agree to the principal employer making the increases. Mr Thomson received yearly discretionary increases in every year up to 2009. This ceased in 2010 and Mr Thomson, along with other members, complained to the Ombudsman. The Company admitted in 2002 that the deficit in the Plan and the Scheme had become too large to justify the provision of discretionary benefits. Mr Thomson argued that the Company's previous actions created a reasonable expectation among the members that the increases would continue and that the Company had given the members assurance of this in its meetings during 2002. Furthermore, he submitted that the Company's failure to consult with the Trustee before deciding not to grant the increases amounted to a failure of process because this broke the Rules' annual review requirement. He argued that this amounted to a breach of the Company's implied duty to act in good faith (as per Prudential Staff Pensions Ltd v The Prudential Assurance Company Ltd and others [2011] EWHC 960 (Ch). In failing to exercise its discretion before reaching a decision, the Trustee also committed a breach of trust. The Company responded that it had

did not have a record of the meetings in 2002, nor of giving any assurances that increases would continue. The Deputy Ombudsman dismissed the complaint by distinguishing the facts in the case of IBM. The members in IBM were given information which gave them a reasonable expectation that certain benefits would be given to them on an ongoing basis. It did not, however, confirm that past actions were sufficient to create this reasonable expectation among the members. Furthermore, it was held that a statement of intention cannot be treated as a promise, guarantee or commitment sufficient to create a reasonable expectation among the members. This applied to Mr Thomson because the decision to grant the increase was discretionary and the employer's previous conduct could not be frustrated by its decision to stop discretionary increases in 2010. The employer did not therefore breach an implied contractual term of mutual trust and confidence, or good faith. There were no process failures, and in view of the fact that the Schemes had significant funding deficits, the employer's decision to end the discretionary payments was valid and rational. Impact: The key point from this case is that past conduct is not sufficient, on its own, to establish the necessary level of reasonable expectation a member must demonstrate in order to argue that they were entitled to any increases. This seems to be the first case since the decision in IBM was published, and whilst the complainant was unsuccessful, it is likely that other members will try to use the "reasonable expectations" argument to challenge employers' attempts to alter scheme benefits. Pensions Ombudsman: Bulk transfer 21 August 2014 A member suffered no loss from a "Barber Window" miscalculation Hayes (PO-2113/PO-2114) The Deputy Pensions Ombudsman has given her determination in a complaint by Mr Hayes against the trustees of the Synthetic Chemicals Pension Scheme (the Scheme Trustee) and the trustees of the SI Group Pension Plan (the Plan Trustee). She partially upheld a complaint by a member who said that a "transfer credit" benefit uplift had been underpaid because the wrong "Barber Window" was used. Mr Hayes was a member of the Synthetic Chemicals Pension Scheme (the Scheme). His employer sold a part of its business in 2000 and the employees, of which Mr Hayes was one, transferring under the agreement were given a choice of either taking their Scheme benefits early when they left, or transferring their accrued benefits to their new employer's plan called the SI Group Pension Plan (the Plan). The transfer value was calculated on a past service reserve basis assuming that the majority of members would carry on in active service, whether they were male or female. The Plan offered a 25% uplift (Transfer Credit) to all transferring members to show that members would not receive a deduction if they took their benefits early at age 62 under the Scheme but not until age 65 under the Plan. Mr Hayes chose to transfer his benefits and received 18 years and eight months pensionable service in the Plan, equating to 14 years and 11 months service in the Scheme and a Transfer Credit in the Plan of 3 years and 9 months. In 2011, the Scheme Trustees realised that there had been an error calculating the bulk transfer value because the "Barber Window" that was used ended in 1994 and not 1991. The Scheme Trustee offered to pay an additional transfer sum of 322,466 to

the Plan Trustee in respect of the longer "Barber Window", however, the Plan Trustee refused to accept this because it was not accepting any more transfers into the Plan. The Plan Trustees then contacted their members to inform them about the error and that they would contact each member individually to confirm the value of each member's fund. As a result of the judgment in Coloroll, which placed the obligation to pay increased benefits due to members as the Plan's responsibility; the Scheme Trustee withdrew the above offer. Consequently, the Plan Trustees informed the members that they would not be able to pay the members an increase in benefits due under the Plan. Mr Hayes complained that he therefore suffered financial loss because the value of his accrued benefits transferred from the Scheme to the Plan was wrong. If the correct "Barber Window" was used then he would have received a higher Transfer Credit, and so he would not have transferred from the Scheme. The Deputy Ombudsman partially upheld the complaint against the Plan Trustee but not against the Scheme Trustee. The 323,466 transfer value was unrelated to the Transfer Credit and the calculation of the Transfer Credit uplift was not contrary to the decision in the Barber case. This would only have happened if there had been a difference in the percentage of credit awarded between male and female members because there were different provisions for early retirement for each, which was not the case. Mr Hayes' 14 years 11 months pensionable service was transferred to the Plan and so he suffered no more than if he had stayed in the Scheme. However, it was the Plan's letter in June 2011, which misled Mr Hayes to think that he would receive more funds and so the Plan Trustees were directed to pay him 300 for his loss of expectation and for the inconvenience caused in pursuing his complaint. Impact: This complaint could arguably have been avoided quite easily because the complaint arose from the complainant's misunderstanding of the effect of the "Barber Window", which in turn, arose from the Plan Trustee's correspondence to the members. This highlights the need for Trustee legal advisors to review and check member communications before they are sent, especially where there are complex legal issues involved. Financial Ombudsman Service: Financial adviser gave wrong advice on a personal pension 16 September 2014 A financial adviser gave incorrect financial advice concerning trivial commutation of a personal pension (Decision Reference DRN1380190) The Financial Ombudsman Service (the FOS) has upheld a complaint against a financial adviser, Towry Limited (Towry), who gave the wrong advice to the complainant. The facts of the complaint are not clear, however, it appears that the complainant set up a personal pension policy with the deliberate intention to withdraw the policy benefits as a lump-sum when she reached 55 years old. She complained that she was forced to take an annuity because Towry failed to warn her that the current tax rules only permit trivial commutation once an individual reaches 60 years old. The FOS upheld the complaint stating that the complainant would not have taken out the policy had she been informed that the benefits could not be withdrawn as a lump sum. Towry were directed to unwind the annuity and ordered Towry to pay the complainant compensation equal to the gilts-based investment return on the contributions paid by the complainant until her 55 th birthday, with applicable interest on the return from her 55 th birthday to the

date of payment added on top. Towry was also ordered to pay 250 compensation for the distress and inconvenience caused to the complainant. Impact: The Government's DC pension flexibility reforms are due, from April 2015, to reduce the minimum age for taking a trivial commutation lump sum or small lump sum to 55 years old. Furthermore, trivial commutation lump sums will only be payable in future from DB schemes on the basis that they will not be needed in DC schemes. Key contacts Sasha Butterworth, Partner +44 (0)333 006 0228 sasha.butterworth@tltsolicitors.com Chris Crighton, Associate +44 (0)333 006 0498 chris.crighton@tltsolicitors.com About TLT Ranked in the top five of all the UK top 100 law firms in Legal Week's Client Satisfaction Survey 2013 and National Firm of the Year at the Legal Business Awards 2013, TLT is an award-winning full-service commercial law firm with a reputation for quality legal services. TLT has a turnover of nearly 58 million, 100 partners, nearly 900 employees and a UK-wide presence with offices in Bristol, London, Manchester, Glasgow, Edinburgh and Belfast. TLT also has an office in Piraeus focused on ship finance work. TLT LLP and TLT NI LLP (a separate practice in Northern Ireland) operate under the TLT brand and are together known as 'TLT'. The firm has leading strengths in the financial services and leisure sectors and in depth experience in the retail and consumer goods, technology & media, renewables, housing and public sectors. We provide specialist expertise in banking, commercial, finance, litigation, employment, IT, real estate and international trade.