Welcome to our latest Pensions Ombudsman Update. These quarterly Updates are designed to help you get to grips with the Ombudsman’s thinking, to keep track of decisions on individual topics and to identify underlying trends. In this edition we look at a selection of the latest determinations and appeals.
Court criticises Ombudsman and urges increase in distress awards
The High Court’s judgment in Baugniet v Capita Employment Benefits  EWHC 501 (Ch) probably did not make the happiest reading for the Ombudsman. The member had requested a transfer of his personal pension to the Teachers’ Pension Scheme. He spotted that the initial service credit estimate given by Teachers’ Pensions (TP) was too low, and asked for it to be recalculated. TP did so, coming up with a new estimate of 6 years 45 days and, three weeks after that, the member instructed the transfer payment. Unfortunately, TP received the transfer value on the day that an embargo on calculating service credits in public sector schemes came into force, pending adoption of new cash equivalent transfer factors. When the embargo was lifted, the member discovered that he had only been credited with 3 years 235 days. Although the Ombudsman found that TP’s mistake had caused the member distress (awarding him £750), he made no award for financial loss.
Last month the High Court agreed with the member that, but for TP’s initial calculation error, he would have received the higher transfer credit before the embargo was imposed. The Ombudsman was not entitled to find that TP’s delay did not cause financial loss. The fatal error was a finding that because there had also been delays on the member’s side, his own conduct entirely negated TP’s delays. Instead, the Ombudsman should have considered the nature and effect of TP’s error and whether it was more likely than not that, “but for” TP’s conduct, he would have obtained the 6 years 45 day credit. The matter was remitted to the Ombudsman.
The judge also remitted the level of the distress award, asking the Ombudsman to take into account not only the incorrect calculation but TP’s lack of candour, an approach to IDRP which “lacked any semblance of objective review” and a delay of nearly five years before the correct calculation was actually made. The judge described TP’s failures as “startling” and observed that “[v]iewed from the perspective of a TPS beneficiary… it would be troubling if TP’s conduct in relation to the administration of [the] transfer in, taken as a whole, was anything less than very exceptional”. He went on to express the strong view that the ‘ceiling’ of £1,000 on distress payments in non-exceptional cases, suggested by the High Court in the case of City and County of Swansea v Johnson in 1998, was now out of touch with the value of money: he urged the Ombudsman to rebase the upper limit at an inflation-adjusted £1,600.
Comment: Despite the increase by the current Ombudsman of the minimum usual distress award to £500, the “ceiling” of £1,000 set by 20th century case law seems intact: at the time this judgment was handed down, his office had still only made two such awards above £1,000 (one of which was later reversed when the High Court found there had been no maladministration). It will be interesting to see how the Ombudsman responds.
Is it always maladministration to get the law wrong?
In determination PO-5395 Mr N (8 February 2017) the member claimed that had his pension provider agreed to transfer his £18,000 pension savings to a different scheme when he first asked it to in 2013, he would have been able to invest in carbon credits with a particular company, an investment which within three months would have increased the value of his pension pot to £11m (this is not a misprint!)
The provider declined to make the transfer as it was not satisfied the member had a statutory transfer right: the receiving scheme related to an employer set up purely to facilitate the transfer, and one with which the member had no earnings.
The Ombudsman accepted that the High Court, in Hughes v The Royal London Mutual Insurance Society Ltd  EWHC 319 had held in February 2016 that such an analysis was wrong: a member could have a right to transfer regardless of the source of his post-transfer earnings. However, had either he or his predecessor issued a determination before Hughes was handed down, they would not have upheld the member’s complaint: the provider’s approach “was in line with the thinking of both this office and other pension professionals at the time”.
Incorrectly interpreting the law was not necessarily maladministration, and it was not therefore maladministration for the provider to have declined the transfer at the time. Absent maladministration, the need to consider the member’s extravagant financial loss claim fell away.
This approach is consistent with case law. In NHS Business Authority v Williams  EWHC 1952 (Ch) Warren J criticised a distress award the former Ombudsman made for maladministration when the Authority misinterpreted the relevant pensions regulations. The Authority had “done no more than take a well-arguable position which, in the event, was incorrect. That is not, in my view, maladministration so that compensation could not be awarded”.
However, it remains equally true that getting the law wrong can amount to maladministration, a principle going back to the pioneer days of the first appeals from the Ombudsman. As Robert Walker J warned in Westminster Council v Haywood  2 All ER 467: “Taking and acting on a wrong view of the law may be maladministration if the decision-maker knows or ought to know that the state of the law is uncertain and that those who may be adversely affected by the uncertainty need to be warned about it”.
Comment: When faced with an issue of legal doubt, trustees cannot dodge the question but must take a view, preferably after taking professional advice. The determination provides comfort that where they have acted reasonably, they should not be penalised for having done so.
Failure to pay death benefits within two years was maladministration
PO-13783 Mrs N (3 March 2017) is the latest case in which administrators failed to pay a lump sum due on a member’s death within two years, triggering a significant tax charge for the beneficiary. It echoes PO-3753 Lettman (30 March 2016), in which the Ombudsman held that failure to process a death grant urgently, to meet the two-year deadline, was maladministration. In making the same finding here the Ombudsman quoted his Adjudicator, who said that “it was not unreasonable for Mrs N to have assumed that, on providing the outstanding information… over a month before the expiry of the two year deadline, that it would be processed and the benefit paid [in time]”.
An intriguing postscript is that in relation to the tax charge that arose, the Ombudsman went on to say: “as it is recognised that I have the same authority as a court, and am making a determination that the death grant be paid, under the Finance Act 2004 the payment is now an authorised payment and not subject to the 45% tax charge”.
Comment: Administrators should be in no doubt that the Ombudsman expects prompt action in death cases, even if they lack all the information they require until a relatively late stage. The determination does not explain why the 45% special lump sum death benefits charge that would have arisen here would be an unauthorised payment, nor precisely from where the Ombudsman derives the power to turn an unauthorised payment into an authorised one. It would be helpful if a future determination could clarify the position.
Overpayments and limitation: no maladministration, no distress award
PO-2215 Mrs G (21 February 2017) saw the Ombudsman, following last year’s High Court decision in the Webber case, hold that a member was entitled to resist claims for recovery of overpayments that had become time-barred. The complication was that Teachers’ Pensions had erroneously claimed those overpayments from the member already, by way of abatement of her pension: the Ombudsman ordered them to be repaid to her with interest.
On the question of a distress award, the Ombudsman departed from the view of his Adjudicator, who had recommended that TP pay the member £500 on the basis that the “whole matter” had caused her significant distress. The member’s complaint, said the Ombudsman, “does not succeed in substance; rather TP’s claim fails on a procedural technicality… it is a well-established principle of law that the Limitation Act bars the remedy TP are seeking, but does not extinguish TP’s right. I have made no findings of any maladministration… as a matter of public policy it would be quite wrong to award Mrs G compensation for distress and inconvenience”.
Employer could exclude member from a slice of PIE
In determination PO-14680 Mr S (1 February 2017) the member complained about not being offered a pensions increase exchange (PIE) option that was made available to other members. The employer told him that he could not access the offer as the potential uplift to his benefits would be insufficient, making the cost of offering the option prohibitive. The Deputy Pensions Ombudsman rejected the complaint. It was up to the employer to decide whether it offered PIE and to whom, so long as it was clear and transparent about why the offer was not made to certain members.
Comment: It is rare for the Ombudsman to disagree with his Adjudicator in published determinations, but his opinion here is clear. It is well-established that if there is no maladministration, he has no power to make an award for distress. Comment: The pragmatic approach seen here will be welcomed by employers and trustees currently contemplating or undertaking liability management exercises like PIEs.
No absolute right to withhold pension for fraud
We finish with determination PO-7277 Mr A (28 March 2017), in which the Ombudsman held that despite the member’s conviction for fraud against his former employer, there was no power under scheme rules to withhold his pension benefits to make up the employer’s loss. The relevant scheme rule applied where “a person has left an employment… in consequence of a criminal, negligent or fraudulent act” but, on the facts, the member had left employment by reason of redundancy, before his crime was uncovered.
Comment: The case is a salutary reminder that parties wishing to rely on lien or set-off clauses must carefully check the width of the relevant wording. The Pensions Act 1995, which allows pension to be withheld in certain circumstances, does not override scheme rules.