Pensions Ombudsman decisions shed light on guaranteed annuity rate complexity

In the first case (7 pages / 365 KB), Mr R lodged a complaint against the administrator of his personal pension plan in relation to its administration, which included administration of a GAR. Mr R’s primary grievance was the inability to set up an annuity payable monthly in advance if he wished to benefit from the GAR. Instead, he was required to take an annuity payable annually in arrears for the GAR provisions to apply.

Mr R had initially established his pension plan in 1988. It included a GAR feature, with the option of an annual annuity payable in arrears, or another form of annuity, without a GAR. This was stated in the original policy, although only a specimen contract was available.  The original policy was not available due to the administrator’s practice of disposing of documents after six years – the PO was not concerned by this.

Mr R thought he should be able to purchase a monthly annuity payable in advance, with the GAR. Over the years he received several illustrative communications from the plan administrator whereby he had understood this to be default. The communications were industry standard and did not mention the GAR.

Mr R cited delays, incorrect information, and numerous phone calls to resolve the issues. On 11 June 2020, Mr R contacted the administrator to clarify the annuity rate to be used. The call handler explained the basis of the annuity claim and offered compensation for the distress and inconvenience caused.

The PO found that the administrator had not acted inappropriately by insisting that Mr R acquire an annuity payable annually in arrears due to the GAR provisions. The PO noted that it was to be expected that a GAR would come with restrictions and Mr R should have understood this from his policy documents.

The PO also confirmed that there was no need for the administrator to provide Mr R with all the information it used to price its annuities.  Mr R had requested details of the percentages by which his estimates had been adjusted on the basis that the annuity was not taken in arrears. This information had been refused by the administrator on the grounds that it was commercially sensitive.

However, the PO did acknowledge that Mr R experienced poor service, including the delays and incorrect information. The administrator had voluntarily paid Mr R £250 for the distress and inconvenience caused (together with £20 for the cost of phone calls) and this was considered satisfactory.

The second case (14 pages / 2.2 MB) involved Mr N who held two policies with a provider, one with a GAR and one without. The GAR policy was a with-profits endowment policy taken out in 1983, while the non-GAR policy was a unitised fund policy taken out in 1998.

Mr N wanted to purchase an annuity with the proceeds of the GAR policy and draw the proceeds of the non-GAR policy as a lump sum.

The provider indicated that he would be able to do this but then withdrew the option and required him to purchase an annuity with the two policies; if he wanted the GAR, this had to be with a particular insurer. Mr N subsequently purchased a single annuity with that insurer.

Mr N complained about the provider’s handling of his small self-administered scheme, which he argued was not transparent and caused him significant distress. Mr N argued that the provider’s approach, which linked the two policies and required him to purchase an annuity from a single insurer to benefit from the GAR, was not compliant with the Pensions Schemes Act 2015. He argued that the company had unilaterally imposed a change in contractual terms without his consent and also highlighted the inconvenience caused by the provider’s slow response and lack of transparency.

The PO held that there was no evidence that the member had to use both policies to purchase annuities with a single insurer in order to benefit from the GAR, and that Mr N should have been given an open market option in relation to the non-GAR policy. Loss was to be assessed as though the member had been given an open market option in relation to the non-GAR policy – the PO said it was too speculative to assess loss on the basis that he would have drawn down a lump sum. The provider was also directed to pay Mr N £600, which it had already offered to Mr N to compensate him for distress and inconvenience.

These cases illustrate the complexities associated with GARs, which can offer valuable benefits but also impose specific conditions that may not align with members’ preferences.

The cases also underscore the importance of clear communication and transparency in the administration of pension plans. The PO’s determinations highlight the need for pension providers to adhere to the terms of their policies while ensuring that members are fully informed and treated fairly.