Summary

The Pensions Ombudsman has upheld a complaint by a retired firefighter, Mr Milne, that the Government Actuary’s Department (GAD) was guilty of maladministration in failing to identify that it had an ongoing responsibility to calculate appropriate factors for commutation of pension benefits for cash lump sums. 

In a decision which is likely to open the floodgates to a host of similar claims in both the Firefighters’ and the Police Pension Schemes, the Ombudsman held that GAD must now notify the scheme administrator of the appropriate factors (which should be applied retrospectively to recalculate benefits), and if – as seems likely – the recalculation leads to the complainant becoming entitled to a further lump sum, GAD is also obliged to pay interest on that amount and to compensate him for any tax liability resulting from the late payment.  

Factual background 

Members of the Firefighters’ Pension Scheme (FPS) have the right to give up part of their pension for a cash lump sum at retirement.  The provisions governing the FPS stipulate that the lump sum is to be the actuarial equivalent of the commuted portion of pension, calculated from tables prepared by GAD. 

The root cause of the complaint brought by Mr Milne was a change in the arrangements between GAD and other Government departments, including the Department for Communities and Local Government (DCLG), which is the department responsible for the overall supervision of the Firefighters’ Pension Scheme. 

Prior to the mid-1990s, GAD had a practice of undertaking, on its own initiative, regular reviews of the appropriateness of the actuarial factors used for cash commutation (and for other purposes) under the FPS.  However, during the early 1990s, new funding arrangements were set up, which required GAD’s governmental ‘clients’ to commission specific pieces of work in order for GAD to be able to invoice for that work.  

In the years following that change, GAD ceased to operate its previous practice, with the result that between 1998 and 2006, no review of the cash commutation factors was undertaken, although GAD did correspond with DCLG on several occasions during that period in relation to actuarial factors for the FPS. 

Mr Milne, who retired in 2005, therefore had his cash lump sum calculated using factors which had not been updated since 1998.  He brought a complaint in 2010 to the Ombudsman complaining that GAD was guilty of maladministration in failing to ensure that the tables were reviewed and updated regularly, and that he had suffered loss as a result (since it was probable that his lump sum would have been materially higher if up-to-date factors had been used).

GAD initially challenged the validity of Mr Milne’s complaint to the Ombudsman on the basis that GAD was not an “administrator” in relation to the FPS during the relevant period.  However, the Court of Appeal determined in 2013 that the Ombudsman did have jurisdiction to hear the complaint, holding that GAD’s role was “central” to the proper operation of the FPS, since the scheme was obliged to use commutation tables provided by GAD, and could not use another actuarial adviser for that purpose. 

The Pensions Ombudsman’s decision 

Having established that Mr Milne’s complaint could be heard, the question for the Ombudsman was whether GAD was, in fact, guilty of maladministration.  He concluded that it was.  

A key factor in this conclusion was the earlier decision of the High Court in a case brought against GAD by the Police Federation in 2009, in which the judge decided that GAD had an implied statutory duty to produce and, if necessary, review and revise commutation tables for the Police Pension Scheme.  The same implied duty arose in relation to the FPS, but GAD had, wrongly, assumed that the changes to the funding arrangements for its services had removed from it the responsibility for instigating a review and revision of the actuarial tables.  In the Ombudsman’s view, this amounted to an “improper surrender by GAD of its statutory function”. 

 In addition, GAD had failed to: 

  • give due consideration to what its essential function under the cash commutation provision was (which should have led it to realise that it had a duty to update the tables or, at the very least, to ensure that DCLG was advised of the importance of updating them);  
  • follow up on its own recommendation, at the time of the last review in 1998, that the tables should be reviewed again in 2001/2 (which was a breach of its professional duties); and  
  • respond comprehensively when DCLG asked questions about updating of certain of the actuarial factors relating to commutation. 

On the question of remedy, the Ombudsman decided that Mr Milne needed to be put in the position he would have been in if GAD had undertaken the necessary reviews of commutation factors during the period 1998 to 2006.  This required GAD to determine what factors would have been in place at Mr Milne’s retirement date if the reviews had taken place at the relevant points in time and to notify those factors to DCLG so that Mr Milne’s lump sum could be recalculated.

GAD was not ordered to pay any additional lump sum due: the Ombudsman considered this should be paid from the FPS, though since neither DCLG nor the relevant fire and rescue authority were parties to the claim, the Ombudsman could not directly order that such payment should be made.  

Finally, although expressing the hope that any additional payment of cash lump sum would be treated by HMRC as tax-free (in the same way as if it had been paid correctly upon his retirement), the Ombudsman concluded that if there were any tax liability, GAD should compensate Mr Milne for that loss.  In addition, the Ombudsman directed that GAD should pay interest upon the amount of any additional lump sum, to compensate Mr Milne for loss of use of that money during the period since his retirement.  Both of these remedies were awarded on the basis that GAD’s special role in the review of actuarial factors meant that GAD owed a duty of care to Mr Milne, which it had breached in such a way as potentially to cause him loss.

 Comment

In both his opening and his closing remarks, the Ombudsman referred to the fact that this change in practice by GAD during the late 1990s and early 2000s had affected both the FPS and the Police Pension Scheme, and that therefore every single member of either scheme who had retired during that period could potentially bring a complaint on the same basis.  

Unsurprisingly, he gave a very strong steer that it was now up to GAD, the relevant Government Departments and the fire and police authorities to enter swiftly into joint discussions to prevent the Ombudsman’s office being overwhelmed by a deluge of equivalent complaints.  In particular, the issue of which public sector pocket or pockets should ultimately pick up the liability to the members was clearly flagged as being a “secondary” matter, and one which should not hold up the process of making what are now long overdue payments to members. 

Assuming that there is no appeal by GAD against the determination, then as the scheme managers under the new scheme regulations, fire and rescue authorities and police pension authorities (ie. Chief Constables) will need as a matter of urgency to identify those members who are affected by this determination, and collaborate with GAD and their respective scheme administrators to recalculate benefit entitlements.  In due course, there will also be the need for discussion with DCLG or the Home Office (as appropriate) over the wider liability issues, since the global price-tag resulting from this decision is unlikely to be small.