In brief

A contractual agreement between an employer and its employees can override the rules of the employer's pension scheme in certain circumstances, as highlighted in a recent update. However, a Pensions Ombudsman case has shown that if an employer tells its employees, mistakenly, that an allowance is pensionable under the scheme rules when agreeing the allowance, this is not, on its own, sufficient to override the rules to make the allowance pensionable. However, the Ombudsman held that the employer's misrepresentation amounted to maladministration as a result of which the employees lost the opportunity to negotiate a higher allowance to take account of its non-pensionable nature, for which they should be compensated.

In more detail

In a meeting with employees in 2003, Calder Industries agreed that employees who worked on a relocation project would receive a daily £20 subsistence payment. Calder's personnel officer confirmed at the meeting that the subsistence payments would be treated as taxed income and were therefore pensionable. In fact, this was not correct and the employees were later informed that their subsistence payments (which amounted to approximately £5,000) would not be treated as pensionable earnings. Two of them, Mr Harris and Mr Hancock, complained to the Pensions Ombudsman, arguing that the representations made by the personnel officer amounted to a binding contractual commitment and that their pensionable salary should be calculated so as to include the payments, resulting in a higher pension.

The Pensions Ombudsman determined that, although there was a legally binding oral contract as to the payment of the subsistence allowance, the terms of the contract did not deal with whether the allowance should be pensionable. The personnel officer's statement was at most a representation. As he and the employees believed the allowance was pensionable in any event, they did not think to deal with this in their agreement.

Although there was no legally binding agreement, the employer's misrepresentation did amount to maladministration. Based on the evidence, the Ombudsman concluded that Mr Harris and Mr Hancock would still have participated in the relocation project even if they had known the allowance was not pensionable, but they may have negotiated a larger allowance. The employer's misrepresentation had deprived them of the opportunity to do so. The employer was therefore ordered to pay Mr Harris and Mr Hancock an additional£5.00 for each day that they worked on the relocation project (based on the Ombudsman's estimate of the larger allowance they would have negotiated) and £250 for the stress and inconvenience occasioned by the maladministration.