Pension trustees must ensure clear communications to members if overpayment issues arise

In a recent case, the PO decided it would not be equitable to allow pension trustees to recoup most of the overpayments made to a pensioner. In a comprehensive examination of his powers and approach to this type of dispute, the PO confirmed he expects trustees to resolve any uncertainty as to members’ entitlements without delay.  Trustees will need to think carefully about how the explain the issue to members, even at an early stage in their investigations, as well as considering the defences the member may have if the trustees decide to attempt recovery.

The PO usually applies a ‘rule of thumb’ in recoupment cases, requiring that the recovery period should be at least as long as the period over which the overpayments build up. However, this case shows how the PO will also look in detail at affordability and advance defences on the member’s behalf..

The case (72 pages / 22 MB) concerned a complaint against the trustees of the BIC UK Pension Scheme who wanted to recover overpayments from a scheme member, Mr E, by reducing future payments.

Overpayments made by the scheme 

Overpayments from the scheme arose from 1991 onwards, after the trustees decided to award discretionary annual increases to pensions. In 2011, it emerged that there was uncertainty about whether this decision was valid under the scheme rules. In 2013, an announcement advised members that there was some uncertainty about whether they were entitled to the pension increases currently being paid. Some increases were suspended whilst the trustees investigated and sought legal advice.

However, it was not until 2019 that the Court of Appeal decided that the pension increases were invalid under the scheme rules.

Communications to members

The PO was critical of the announcements to members alerting them to the potential overpayments. The announcements did not clearly explain to members the implications if overpayments were confirmed, nor did they make it clear that by maintaining current pension levels, overpayments were continuing to build up.

The announcements also failed to explain the possible implications for pensioners should the court decide increases had not been validly granted – in particular, that pensioners might have to repay the money. Even after the Court of Appeal decision, a 2019 announcement to members said that the trustees were considering how to implement the court’s decision, but did not explain that the overpayments could be recovered by deduction from future pension payments.

The trustees argued that it would have been premature to advise members in announcements made in 2013 and 2017 that they may seek to recover overpayments as this was uncertain until the Court of Appeal decision in 2019.

However, in the PO’s view, if the trustees wanted to reserve the right to reclaim overpaid pension increases at a future date, they were required to spell this out explicitly. He considered the announcement was “poorly drafted and overly reassuring to the pensioners” and this meant members could not have been aware that overpayments were still being made. Also, members were not told that they should not spend any of the additional pension payments that continued to be paid.

The PO found that Mr E was not acting in bad faith by continuing to spend his income.From the date of the 2013 announcement until around 1 August 2019, the evidence showed that Mr E spent what was reasonable based on his pension income and the PO was satisfied he would not have done so if the 2013 announcement had adequately alerted him to the fact he might have to repay the money.

If it emerges that members may not be receiving the correct amount of benefits, trustees will want to avoid causing undue alarm in their communications – in particular whilst they are still investigating the matter. However, trustees must balance this against the need to explain the problem to members clearly and fully. They will need to set out the implications should the overpayments be confirmed so that members are on notice that they may be asked to repay some benefits in future.

The PO also considered whether it had been represented to Mr E that he was entitled to the overpayments when he was sent payslips, retirement statements and annual P60s  The PO noted that the trustees were under a legal duty to pay the correct pension and there was no caveat in these documents.  Therefore, Mr E had reasonably relied on the payslips and other documents and spent up to his income on the basis that the payments were correct.

Trustees should review the communications sent to members at and after retirement and consider whether to add a simple statement that all payments are subject to the trust deed and rules.   

Delays in confirming the overpayments

The PO also criticised the length of time it took for the scheme to confirm that overpayments had been made, considering this issue in detail to decide whether trustees had lost their right to recover overpayments.

It was over six years from the date the issue was first identified until the first court ruling. The PO found that this was a considerable period of time during which the members were “effectively left in limbo” while the trustees were aware that potential overpayments may have been building up.

Given the importance of the matter and the implications for members, the PO found that it was unacceptable for matters to have progressed this slowly.

When preparing announcements, it is sensible for trustees to think about how the wording may appear to the Ombudsman or to the courts if there is a dispute in the future. It is hard to say what timeframe would be appropriate for this type of investigation, but the PO was persuaded that “events were not moving quickly” and six years of uncertainty was a “considerable period of time”.

The impact of recoupment on members’ financial circumstances

When considering whether it would be equitable for the trustees to recover the overpayments, the PO also considered the impact on Mr E’s financial position. The overpayments here totalled over £90,000 and were made over a prolonged period of time - in excess of 24 years - meaning that there were problems obtaining relevant evidence.

Trustees in a similar position should be aware that the PO made decisions about Mr E’s expenditure patterns on the balance of probabilities. For example, missing bank statements did not prevent the PO from forming a view on Mr E’s likely expenditure patterns by reference to other available evidence.

The PO decided that the evidence showed Mr E acted in good faith and was a man who lived within his means who spent money as he did because he was receiving overpayments. He suffered detriment because of the overpayments, effectively building up a debt which he was not told he could be asked to repay.

Trustees were not permitted to recover overpayments made prior to 1 August 2019, meaning just £6,554 of the total overpayments were considered recoverable, at a rate of £200 per month. The PO also made an award of £1,000 for the serious distress and inconvenience sustained by Mr E, bearing in mind the time the trustees took to resolve the uncertainty about the pension increase rule.

Co-written by Hayley Goldstone of Pinsent Masons.