This note sets out key lessons for trustees from the Ombudsman’s determination, then takes a deeper dive into the facts and legal analysis in Mr E’s case.
For further discussion of handling members’ complaints and correcting mistakes, please listen to our recent HL PensionsPod with Duncan Buchanan and Jim Davis.
Overpayments: key takeaways for trustees
Act swiftly
Take action as soon as you become aware that benefits may have been overpaid and move matters along as quickly as possible. The Ombudsman noted that in ongoing overpayment cases “time is of the essence”.
Don't sugar-coat communications with members
Inform potentially affected members and in clear and unambiguous terms that:
- They may have been overpaid;
- Future instalments of benefit may need to be reduced; and
- Past overpayments may need to be recovered (ideally with an indication of how much is the “pension at risk”).
Telling members that the trustees may need to reduce benefits and recover overpayments are difficult messages. Trustees may be understandably reluctant to give members bad news until they are certain of the position.
However, the case of Mr E demonstrates the importance of clear communication at an early stage. If a member understands that their true benefit entitlement may be less than they had believed, the member is on notice and has the opportunity to reduce expenditure appropriately – making a defence of change of position harder to uphold at a later stage.
Establish the correct position and the amount of any overpayments
In reality, this may take time – especially in cases of systemic error – and is likely to require cooperation between your administrator, benefit consultant and legal advisers. Detailed legal advice may be needed and, in some cases, an application to the Court.
Reduce future instalments of benefits to the correct level
This will prevent further overpayments building up, while you consider how best to seek recovery of past overpayments.
Keep the sponsoring employer informed
The sponsoring employer should be notified of the potential overpayment and your actions to investigate and recover any overpaid benefits.
In some cases, the employer may prefer for trustees to forego recovery of the overpayment, with the employer funding the cost of the overpaid benefits. This may be the preferred option if the overpaid members are particularly vulnerable and/or the employer is concerned about adverse public relations.
Explore any member defences
Where a member disputes the recovery of overpayments, consider any defences which the member could rely on when going through your internal dispute resolution procedure (IDRP), whether or not these are specifically raised by the member.
Most members are unlikely to be lawyers, or to have legal representation. The Ombudsman considers it good practice for trustees to explore whether a defence may be available to an overpaid member – and that, where this is not done, the Ombudsman should make “generous allowance” for the fact that the member is unrepresented.
Return to contents.
Mr E: what happened?
The case concerned an attempt to improve benefits (by introducing increases for pensions in payment derived from pensionable service before April 1997 (“Pre-97 Increases”)) and the subsequent discovery that the amendment might not be valid – sadly, a not uncommon scenario.
Unfortunately, considerable time elapsed between starting to pay increases in 1992 and an eventual decision by the Court of Appeal in 2019 (BIC UK v Burgess) that the Pre-97 Increases had not been validly introduced.
The Court of Appeal decision potentially affected 194 pensioners who had been overpaid pensions. At the time of the determination in Mr E’s case, the Ombudsman was considering complaints from four other members. Other pensioners (apart from a few who had died) had agreed repayment plans with the Trustees.
How much was Mr E overpaid?
In a nutshell:
- Mr E retired in 1995 with a pension of £11,500 per year;
- By December 2012, Mr E’s annual pension had increased to £18,600 (but, without the Pre-97 Increases, it would have been only £12,100 per year); and
- Overpayments of, in total, £90,934 were made to Mr E over nearly 25 years.
What were the members told?
The Trustees (or their administrators) made the following key announcements to members:
- 1992 Announcement: that Pre-97 increases would be applied to all pensions commencing after 6 April 1992;
- February 2013 Announcement: that a potential issue had been identified and that further Pre-97 Increases would be suspended from March 2013 but that this “only relates to future increases…at this time”;
- March 2017 Announcement: that the Trustees had applied to the Court for a ruling on whether the Pre-97 Increases had been validly granted – but, significantly, with no explanation that overpayments were potentially still building up; and
- May 2019 Announcement: that the Court of Appeal had found the Pre-97 Increases to be invalid and that the Trustees were discussing how to implement the decision with their advisers.
Return to contents.
The legal position: should overpayments be recovered?
The starting point is that members are entitled only to the benefits set out in the trust deed and rules. Trustees should seek to recover any overpayment, unless the sponsoring employer agrees to fund the additional cost.
However, recovery may be inequitable (and therefore not allowed) in the case of a particular member – which will need to be decided on the facts of the individual member’s case.
Repayment or recoupment: what's the difference?
Trustees can recover an overpayment from a member in two different ways:
- By seeking direct payment from the member; or
- By deducting the overpayment from future instalments of benefit (known as “recoupment”).
In practice, recouping an overpayment by reducing a member’s future benefits can be more straightforward (and easier to present) than asking a member for direct repayment.
The Trustees' plan for recovering the overpayment from Mr E
The Trustees opted to recover overpayments to Mr E by recoupment. In March 2020, the Trustees notified him that they would:
- Reduce his pension to the correct amount from July 2020 (from £1,552 to £1,055 per month); and
- Recoup £307 per month for 24 years from October 2020, leaving Mr E with a reduced pension of £748 per month.
Given Mr E’s age, it was likely that he would not live to the end of the 24 year recoupment period. The Trustees indicated that they would not try to recover any amount outstanding following Mr E’s death.
Long recoupment period did not make recoupment "equitable"
Previous Pensions Ombudsmen have applied a rule of thumb that the proposed recovery time for any recoupment should be at least as long as the period over which the overpayments had been made.
In Mr E’s case the employer argued that, by proposing a recovery period of 24 years, the recoupment from Mr E’s future instalments of pension was equitable.
The Ombudsman disagreed: whether recoupment was equitable was a separate issue to whether the proposed rate of recoupment was appropriate.
The Ombudsman therefore considered how various equitable principles would apply in Mr E’s case, to decide whether recoupment should be allowed at all.
Had the Trustees given representations that Mr E's pension was correct?
Mr E had received a retirement statement, monthly payslips and annual P60s on behalf of the Trustees, which the Ombudsman found amounted to unambiguous representations that he was entitled to the pension stated.
Even without these statements, the payment of pension itself was an implied representation that Mr E was entitled to these payments, given the Trustees’ obligation to pay the correct benefits and deduct the correct level of PAYE.
Had Mr E changed his position in reliance on the Trustees' representations?
It was reasonably foreseeable that Mr E would rely on the Trustees’ express and implied representations as to the correct amount of his pension.
Mr E’s submissions and the Ombudsman’s investigation included a detailed review of his income and expenditure over the 25 year period of overpayment. Mr E was found to have raised his living expenses to match, but not exceed, the level of his pension.
The Ombudsman concluded that Mr E was the sort of person who lives within his means and who would not have built up a “debt” of £90,000 had he known the correct position.
Had Mr E suffered detriment?
The Ombudsman found that Mr E had suffered detriment to the extent that he had spent the overpaid pension irreversibly on general living expenses, which he would not otherwise have done.
The 2013 Announcement: should try harder...
The Ombudsman was especially critical of the Trustees’ February 2013 Announcement to members. In the Ombudsman’s words, the announcement suggested that the “wound had been staunched” when in fact “blood continued to flow”.
While the announcement made clear that further pension increases would not be paid until the correct legal position had been established, a lay pensioner would not reasonably have realised that – even without future increases – the level of pension being paid already included increases which could be invalid. The potential debts owed by pensioners therefore continued to increase, without their knowledge.
Had Mr E acted in good faith?
The Ombudsman found that Mr E had had no reason to suspect, and could not have known, that he was not entitled to the Pre-97 Increases. He had been told that the increases were due; had received payslips from the Trustees detailing the pension increases; and had conducted his financial affairs on the basis that he was entitled to the money.
Had the 2013 Announcement adequately alerted Mr E that he might have to repay some of his pension, he would not have continued to spend up to the level of his pension.
Mr E had therefore acted in good faith in continuing to spend his pension in full, both before and after the 2013 Announcement.
Impact of the 2019 Announcement
The 2019 Announcement told members that the Pre-97 Increases were invalid. Bank statements showed Mr E started to build up savings from shortly after the 2019 Announcement, which indicated that he was no longer spending up to the level of his pension.
The Ombudsman found that Mr E could no longer rely on the defence of change of position for the period after the 2019 Announcement.
Return to contents.
The need to get on with it... ("laches")
A member may also have a defence in equity if the claimant has improperly delayed in pursuing its claim.
In Mr E’s case, the Ombudsman noted that more than six years had passed from first identifying the potential issue with the Pre-97 Increases in 2011 and the High Court’s decision in 2018. Given the implications for members if it turned out that the increases had not been validly granted, time was of the essence. If the Trustees had pursued the matter with appropriate diligence, it would have been resolved much earlier.
In the circumstances, and given the inadequacy of the February 2013 Announcement, the Ombudsman rejected the Trustees’ claim that they should be allowed to recover overpayments made in the period from the 2013 Announcement to the 2019 Announcement.
Return to contents.
Recoupment: when is an order needed from a "competent court"?
Section 91 of the Pensions Act 1995 provides that, if a member disputes the amount of an overpayment, the trustees may only recoup that overpayment through deduction from future benefit payments with the order of a “competent court”.
For many years, it was assumed that the Pensions Ombudsman was a “competent court” for this purpose. More recent caselaw has overturned this view – meaning that if a member disputes the recovery of overpayments by recoupment, the trustees may only proceed if they obtain an order from the County Court.
The Ombudsman has said that his determinations going forward will include the amount and rate of any recoupment permitted, which can then be authorised by the County Court.
Return to contents.
Back to Mr E: what did the Ombudsman decide?
In Mr E’s case, the Ombudsman directed that:
- The Trustees could recoup £6,554 (the “Recoverable Amount”), which was the amount overpaid since 1 August 2019, from Mr E’s future pension at the rate of £200 per month. This was subject to the requirement for an order of a competent court.
- The Trustees could not recoup the remainder of the overpayments to Mr E – which totalled £84,380.
- The Trustees must pay £1,000 to Mr E as compensation for distress and inconvenience.
- If Mr E decides to pay the £1,000 award (or to make other payments) to reduce the Recoverable Amount, then the amount to be recouped must be reduced.
- In future, if Mr E demonstrates to the Trustees' satisfaction that his financial circumstances have deteriorated and that deductions of £200 per month are unaffordable, then the Trustees must consider whether it is still equitable to recoup the overpayment at this rate.
Return to contents.
Authored by the Pension Team.
