This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:

Pensions Ombudsman rejects complaint challenging recoupment of mistaken overpayment

In the recent case of Dr S (PO-22315), the Pensions Ombudsman rejected a complaint that the USS Pension Scheme (USS) could not recoup a mistaken overpayment from future pension instalments. The overpayment arose due to a miscalculation of extra service contributions paid after Dr S had reached maximum pensionable service in the USS (40 years). Dr S brought his complaint on several grounds, including:

  • a “change of position” defence to the recovery of the overpayment because he had used the overpayment to renovate his kitchen and gift money to his daughter, so the money could not be recovered.
  • if the Ombudsman did not agree that Dr S had a defence to recovery, then the USS was only able to claim back that part of the overpayment which fell within a six year limitation period under the Limitation Act 1980. Dr S said that this was because:
    • The case of Burgess v BIC UK Ltd (which found that recouping overpayments from future pension payments was an equitable remedy and not subject to the six year limitation period) did not apply because it concerned different facts. Burgess concerned repayments from pensioners in order to make an adjustment to the fund as a whole, rather than individual overpayments. In addition, the judge’s comments in Burgess about the six year limitation period not applying to recoupment were made ‘obiter’, i.e. they were not intended to set a precedent. Dr S said this meant that Burgess was not relevant to his case.
    • In other cases, the Ombudsman had applied Webber v Department for Education to find that overpayments were subject to a six year limitation period.
  • In any event, the USS could not recoup the overpayment from Dr S’s pension instalments because the overpayment was in dispute, and this meant that the USS was required under section 91 of the Pensions Act 1995 to obtain an order of a “competent court”, upholding the legitimacy of the overpayment, before deductions could be made from Dr S’s pension. Dr S said that the USS had not done this.

In dismissing the complaint, the Ombudsman found that:

  • Dr S did not have a defence to recovery of the overpayment. This was in part because the difference between the overpayment and the correct pension payment was relatively small (4%), and Dr S had spent a much larger amount on his kitchen and gifts to his daughter. Dr S would probably have acted in the same way had he received the correct benefits at retirement.
  • It is an established legal position that the six year limitation period does not apply to the equitable remedy of recoupment. This was the position before Burgess, and Burgess merely restated it. Webber concerned repayment rather than recoupment out of future income, so was not relevant. The Limitation Act 1980 therefore did not prevent the USS from recouping the entire overpayment.
  • A determination by the Ombudsman upholding the legitimacy of an overpayment is an order of a competent court for the purposes of section 91 of the Pensions Act 1995. This is in line with the Ombudsman’s April 2019 statement on this issue (which we discussed in the May 2019 edition of Snapshot). Section 91 therefore did not prevent the USS from making deductions from Dr S’s pension to recoup the overpayment.

Dr S was required to repay the full overpayment, but was awarded £750 in respect of maladministration by the USS.

Stricter TKU regime on the way

The Pensions Regulator (TPR) has responded to its “Future of Trusteeship” consultation which took place during Q3 2019. Here is what trustees need to know.

  1. Stricter trustee knowledge and understanding regime As part of TPR’s overhaul and consolidation of its Codes of Practice over the next year or so, TPR will be modifying the trustee knowledge and understanding (TKU) elements and supporting guidance, with updated requirements on TKU and overall trustee competence. TPR has signalled that it will expect lay trustees to have at least 15 hours of ongoing learning and for a higher 25 hour requirement to apply to professional trustees. Furthermore, once its new TKU materials have been in place for a “reasonable period”, TPR intends to quiz all trustee boards actively (presumably via a questionnaire) on how they are complying with the updated TKU and trustee competence requirements. TPR will then engage directly with trustee boards whose responses miss the mark.
  2. No mandatory professional trustee The most controversial idea floated by TPR in the consultation was a mandatory requirement for schemes to appoint an accredited professional trustee. The consultation response indicates that this received broadly negative feedback. For now at least, TPR has dropped the idea.
  3. Sole trusteeship TPR indicated some concerns with independent trusteeship models in the consultation, such as anecdotal evidence that employers might be replacing trustee boards with a sole trustee to achieve employer-friendly scheme funding arrangements. In the consultation response, TPR does not reach any firm conclusion on the matter, noting that it continues to have concerns particularly around how effective certain sole trusteeship models are at dealing with conflict issues and ensuring member engagement. As a result, TPR will be carrying out separate research on the sole trusteeship market to determine if any regulatory reforms are needed.
  4. Diversity TPR does not intend to introduce a requirement for schemes to report on diversity and inclusion matters (for now) but TPR will raise the profile of diversity and inclusion matters for trustee boards by establishing and chairing an industry-wide working group.
  5. DC consolidation TPR has made clear its aim for occupational DC schemes to consolidate; particularly smaller schemes where it has general governance concerns. The difficulty with this is forcing consolidation for DC schemes that contain guarantees (such as schemes invested in with-profits funds). The consultation response does not reach any firm landing on surmounting that difficulty but hints that TPR and DWP may be investigating how to force insurers to assign guaranteed investment policies.

The Pension Schemes Bill progresses

The Pensions Schemes Bill 2019-21 (previously named 2019-20) has now had its first and second sittings of the House of Lords Parliamentary committee stage at which further information was sought and amendments were proposed. A few points of note:

  • Proposed amendments to criminal sanctions in clause 107 (an offence of avoidance of employer debt and an offence of conduct risking accrued scheme benefits) have not been taken forward. The proposals were to insert references such as “wilful or “reckless” conduct. It was confirmed by the government’s minister in committee that its policy was to strike a balance between protecting members’ benefits while taking impact on business into account. Specific guidance, to be consulted on, will be published by the Pensions Regulator on its approach to prosecuting the new offences.
  • The detail on certain reforms, such as the framework for collective money purchase schemes and new trustee governance duties regarding climate change risk, will be set out in secondary legislation to be consulted on.
  • With regard to measures on climate change governance, it was considered that trustees should act within their fiduciary duty to protect members’ benefits against the risk posed by climate change. It was not the intention of government to direct schemes or set their investment strategies. Once the Bill has gone through Parliament there will be further consultation on how to address the recommendations of the Taskforce on Climate-related Financial Disclosures.

Trustees fettered their discretion in rigidly sticking to ill-health criteria not found in scheme rules

In this case, Mr S was suffering from MS and applied for an ill-health early retirement pension from his scheme. He was initially refused this on the basis that his pension constituted pre-1988 GMP and this could not be reduced (an early retirement pension on grounds of ill-health would otherwise be subject to reduction from the scheme). It was subsequently ascertained that the trustees of the scheme had a discretion to waive the reduction for early payment of pension where the member was able to prove ‘serious ill-health’.

The meaning of ‘serious ill-health’ was not defined in the rules with the trustees instead using grading criteria with ‘Grade 5’ medical incapacity being the grade at which they would exercise their discretion to pay an ill-health pension unreduced. In this case the trustees decided that the member did not meet the requirements for ‘Grade 5’ medical incapacity.

The Ombudsman held that the trustees had fettered their discretion by rigidly sticking to the grading criteria which was not written into the rules (i.e. the rules read alone would have given them more flexibility and potentially allowed them to exercise the discretion to pay the pension unreduced). This constituted maladministration and the Ombudsman directed the Trustees to review their decision and consider the exercise of their discretion properly without the constraint of this grading criteria.

The case is interesting in that it highlights that trustees could be fettering their discretion when they are applying policies rigidly which do not otherwise form part of their scheme rules.