Pension disputes: care needed over member communications

The Pensions Ombudsman (PO), which hears complaints by pension scheme members who have exhausted the provider’s own complaints mechanisms, recently handed down determinations in two cases brought by members who had expected higher levels of benefits.

A third recent decision, dealing with a pension sharing order in the context of a divorce, will also be of interest to providers.

Reflecting terms in member communications

In Mr M (CAS-42040-W3P6), the PO dismissed a complaint brought by a member against a self-invested personal pension (SIPP) provider which had declined to honour a discount on fees charged when his benefits were transferred into the SIPP. Although Mr M had been advised in correspondence that there would be a “permanent discount” on the annual administration fee, the PO found that the provider’s terms and conditions took precedence over this wording.

The provider’s terms allowed it to make changes to its fees as a proportionate response to legitimate cost increases, and where it had other valid reasons to do so. Here, the change was made to bring the fees paid by Mr M into line with those paid by members with similar investment profiles, which the PO found was a “valid reason” in line with the wording of the terms.

The PO agreed with his adjudicator that the use by the provider of the word “permanent” in its communications with Mr M was unfortunate, as it suggested that the discount would be present for the lifetime of the SIPP. However, he found that the information was given to Mr M by the provider in good faith and found no reason to doubt that, at the time, it was the provider’s intention that the fee discount would apply for the lifetime of the product.

It is often the case that members bring complaints where benefits provided in accordance with scheme rules do not align with the member’s expectations. Schemes can help to avoid disputes by ensuring that their correspondence with members reflects the overriding scheme rules and provider’s terms and conditions.

Compensating members’ reasonable expectations

In Mr N (PO-22137), the PO partly upheld a complaint brought by a scheme member who was given inaccurate and incomplete information about how deferred pension increases would be calculated. Mr N complained that his deferred pension was not increased at a fixed revaluation rate, contrary to the information he received when he left the scheme, meaning that he could no longer expect the benefits he was told he would receive on retirement.

Mr N became a deferred member of the scheme on voluntary redundancy in 1993. He received a ‘leaver’s certificate’ and ‘scheme booklet’ which led him to reasonably expect that he would receive a pension of £19,745.40 at his normal retirement date. It did not state that the benefits listed were estimates only. The booklet also said that his benefits above guaranteed minimum pension would be increased at 5% per year until normal retirement age, with no qualification to this.

In 2018, Mr N received a statement with a projected retirement income of £14,481.24. The projected benefits in the statement were calculated in accordance with the scheme rules, which provide for an annual increase of the increase in the RPI rate of inflation, up to a maximum of 5% a year. Mr N is not entitled to the fixed 5% increase described in previous information under the scheme rules.

The PO found that Mr N was not entitled to a guaranteed scheme pension at the level set out in the leaver’s certificate, but that it was reasonable for him to have expected to receive it. The PO therefore awarded compensation of £1,000 for Mr N’s serious distress and inconvenience. Mr N had not irreversibly relied on the misleading information, and so would not suffer any financial loss. The determination shows that while members are not necessarily entitled to higher benefits because they have been given inaccurate information, such information can still give rise to serious non-financial loss.

Pension sharing on divorce

In Mr S (CAS-42431-G2M7), the PO partially upheld a member’s complaint in respect of the pension scheme’s handing of his pension sharing order.

Ms S had transferred his pension into a SIPP and took a pension commencement lump sum. However, under the terms of the pension sharing order, consent to the transfer should have been sought from his ex-wife, and she should have been paid 50% of that lump sum. Mr S had not expected that his ex-wife would be entitled to a share of the lump sum as this represented ‘protected rights’, which could not be part of a divorce settlement at the time the court order was made. However, the legal position subsequently changed. The scheme sought to recover the overpayment made to Mr S.

The PO decided that the scheme’s failure to take account of the pension sharing order at the time of the transfer amounted to significant maladministration. There were also failures in how the complaint was handled. However, it was reasonable for the provider to seek to recover the overpayment from Mr S once it had correctly interpreted the terms of the order and applied them to the scheme as required by the court. Mr S was awarded £1,000 for serious distress and inconvenience.

Pension schemes should ensure that they have processes in place to comply with the terms of any court orders when a member is divorced. In this case, the PO acknowledged that the wording of the order had caused a problem. The scheme was required to follow the wording of the court order or risk acting in contempt of court. It was open to the member to separately seek a variation of the court order, as the changes in the law meant that it did not reflect the agreed divorce settlement.

Co-written by Lorna Khemraz of Pinsent Masons