A recent decision by the Pensions Ombudsman sounds a warning bell for employers who fail to give proper advice to employees about the effects of tax on their pension entitlements.

In Cherry (PO-7096) the Ombudsman upheld a complaint against Mr Cherry’s employer (the Police and Crime Commissioner of South Wales ‘the Commissioner’) in relation to its failure to inform Mr Cherry of the tax penalties on his retirement benefits when he took up subsequent employment with the same employer. The Ombudsman held that the Commissioner had a duty of care, as Mr Cherry’s employer, to have informed him of the tax implications of re-employment on his retirement benefits.

Read the full case here.

Decisions by Pensions Ombudsmen will turn on their facts so this does mean that it is sometimes hard to draw firm conclusions from their decisions. However, given that the implications of this decision could result in significant cost to an employer, it is important that employers flag up when an employee’s employment changes in such a way as to result in possible changes to their tax status.

Mr Cherry, a police officer, retired on 12 June 2011 and took retirement benefits. Within one month he was offered and took up re-employment with the Commissioner. A Home Office circular on the relevant police pensions regulation explaining changes to police pensions provided that where there is a break in employment of at least one month and the employment is materially different, an employee would not lose their protected pension age. In this case, however, Mr Cherry returned within a month to exactly the same job. The Commissioner argued that it was for individuals to take their own independent financial or legal advice but the Ombudsman did not consider this to be a case of an employer giving advice; it was about the provision of relevant information to employees about the impact on his or her benefits following re-employment. It was reasonable, said the Ombudsman, to expect the Commissioner to have provided the salient information to Mr Cherry. As a consequence of the Commissioner’s failure to do so, it should reasonably meet the tax liabilities incurred by Mr Cherry.

As noted above, decisions of the Ombudsman can vary depending on the facts. In Ascough (PO-7834) the widow of a council employee argued that her deceased husband should have been considered for an ill health pension before he was made redundant. While sympathetic to Mrs Ascough, the Ombudsman found that there had been no maladministration on the part of the Council. The Ombudsman could find no evidence that Mr Ascough had been misled by his employer and further found that the decision as to the grounds of dismissal of an employee was an employment issue and not for him to consider. However, in Parr (23730/1) the Deputy Pensions Ombudsman partially upheld Mr Parr’s complaint that his employer, the Bank of New York, should have advised him that he could apply for ill-health (unreduced) early retirement as an active member of the Bank’s pension plan.

In the employment law context, the House of Lords ruled in Scally v Southern Health and Social Services Board [1992] that an obligation should be implied into the contracts of employment of doctors that their employer should have taken reasonable steps to bring certain pension entitlements to the employees’ attention subject to certain conditions being met. However there is no general obligation on an employer to exercise reasonable care for an employee’s economic well-being. It is not an employer’s function to act as the employee’s financial advisor. Whilst in Parr the Deputy Pensions Ombudsman did not expressly apply Scally (although the case was considered by him), his decision endorses that position.

It is clear that an employer would be wise to ensure that it takes steps to make relevant information available to an employee so that the employee can make informed decisions. At the least, an employer should highlight any potential tax or other issues that may arise and suggest that the employee obtains advice on this. As in Cherry, a failure to do so could prove costly.