This article gives a high-level overview of the key issues pension trustees need to consider when faced with overpayment issues.
In recent months, we have seen more and more queries from pension scheme trustees about overpayments. Recent court cases, most notably Webber v Department for Education and Burgess v BIC, have brought overpayments squarely into the pensions spotlight and it is important that trustees know how to respond to overpayments issues as and when they arise. This article gives a high-level overview of the key issues trustees should consider when faced with an overpayment issue, including some thoughts on practical points.
What do we mean by overpayments?
For the purpose of this article, when we refer to overpayments we are talking about a member or a beneficiary being paid more than they are entitled to under the scheme rules or under legislation. There are two primary kinds of overpayment:
- on-going overpayments: this is where the member or beneficiary has been continually overpaid (for example, where a rate of payment of pension has been miscalculated and then the incorrect pension continues to be paid each month until identified)
- one-off payments: where a lump sum has been paid that is higher than it should have been.
What are trustees' duties on overpayments?
The starting point is always that the member or beneficiary is only entitled to the level of benefit set out in the scheme's rules or under legislation. This means that trustees have a duty to correct the position to prevent further overpayments going forward. The issue with this is that members or beneficiaries are likely to have become used to receiving a larger pension payment than they were entitled to. It is for this reason that trustees should always give thought to the timeframe for correction. Many factors will be relevant to the approach trustees should take, including the level of overpayments and the member or beneficiary's personal circumstances, but in most cases it may be appropriate to permit the member or beneficiary a period of notice of at least a month to allow them to adjust to what will be a new (albeit correct) level of pension provision.
Returning to the starting point mentioned above, trustees also have a duty to gather back in assets wrongly paid from the scheme. This means they will need to take steps to recover any previous overpayments, unless they have taken a well-documented and justifiable decision not to recover. In considering their approach to recovery, trustees should consider all relevant factors, including whether the scheme rules or legislation contain any specific provisions on overpayment; how long the overpayments have been made; who is at fault for the overpayments; whether the member knew or should reasonably have known he or she was being overpaid; and whether the member or beneficiary has any defence to recovery.
Trustees' options for recovery
In the absence of clear guidance in the scheme's rules or governing legislation, the options for recovery are recoupment and repayment.
Recoupment is the simplest option. This is in essence a 'self-help' remedy, whereby the trustees recover the overpaid sums by making deductions from future payments to members. While this is the simplest means of recovery, there are nonetheless two important considerations for trustees. First, it must not be unfair to make the adjustments to pension payments. Second, the rate of recoupment must not be unduly harsh such that it might be considered 'inequitable'. It is often thought that, where possible, it is best for recoupment to take place over the same or a similar period as the period of the overpayments. The Pensions Ombudsman has made it clear that a sensitive approach is expected.
The alternative for trustees is repayment (or restitution) by the member. In circumstances where there has been an overpayment because of a factual or legal mistake, this involves directly asking members or beneficiaries to return their overpayments. While many members recognise the need to repay, some are understandably reluctant to pay back money they have been receiving because of somebody else's mistake. This can make repayment a more complicated way forward. There are also reputational and financial issues to consider if members or beneficiaries refuse to repay, as court proceedings would then be required to facilitate recovery.
Limitations on recovery
One of the most confusing aspects of the law on overpayments is limitation (that is, the rules on the point at which recovery of overpayments becomes time-barred). These rules have been helpfully clarified in the two cases referenced above, Webber v Department for Education and Burgess v BIC, and it is now clear that the rules on limitation differ for recoupment and repayment (though the judgment in Burgess v BIC is subject to an appeal in the Court of Appeal later this year).
With recoupment, there is theoretically no time limit on how far back trustees can look for recovery of overpayments (although recovery must always be equitable).
With repayment, the starting point is that there is usually a six-year time period from the date of the overpayment within which the trustees can make recovery. 'Usually' is the key word, because where the overpayment is the result of a mistake, that period can change. If the overpayment was caused by a mistake, then the six year period only begins when the mistake could with reasonable due diligence have been discovered. That means if a mistake was made longer than six years ago, but could not have reasonably been discovered until five years ago, repayment of the overpayment would still be an option for the trustees.
Where repayment is disputed, overpayments can be reclaimed in the six year period prior to the Pensions Ombudsman receiving the trustees' response to the member's complaint. For the member, stopping the clock is important, as this maximises the number of mistaken overpayments (and mistaken overpayments reasonably discovered) in the six year period which the trustees will then legally be entitled to seek repayment of. He or she will therefore want to refer the matter promptly to the Pensions Ombudsman.
What about defences to recovery?
Members or beneficiaries can also have defences to recovery of the overpayment. The two primary defences are change of position and estoppel by representation.
The change of position defence applies where a member or beneficiary has so materially changed their position that it would be inequitable or they will suffer injustice if they had to repay the money. However, to access this remedy the member or beneficiary must have acted honestly; if they knew they were being overpaid then this defence is not available. This is a flexible defence, in that a member or beneficiary could still be required to repay some of the overpayment, even if it would be inequitable to ask them to repay the full amount.
In contrast, estoppel by representation is an all-or-nothing defence. For a member or beneficiary to access this defence, they must show that there has been an unambiguous representation on which they have reasonably relied to their detriment. While this defence requires clear evidence of an unambiguous representation and firm, rather than speculative, evidence of detrimental reliance (and is therefore not often straightforward to establish), its availability to members highlights the importance of ensuring member communications and any disclaimers contained within them are clear.
What else should trustees consider?
While it remains unclear whether a member or beneficiary's consent is required for recoupment, pending the Court of Appeal's judgment in Burgess v BIC, in practice, it is always best to obtain the member or beneficiary's consent or a court judgment for recoupment. Self-evidently, the member’s agreement (and participation) is always required for repayment. Additionally, while the starting point is always that recovery should be made, trustees may take a view that a 'de minimis' amount of overpayment is not worth seeking to recover on the basis of a cost-benefit analysis to the scheme.
An important thing to remember in this respect is that if trustees decide for example that 'overpayments of £500 or below will not be recovered', then it may be in the interests of fairness and good administration for all members or beneficiaries with overpayments greater than £500 to have the overpayment reduced by this amount as well. Trustees may also decide to reduce the level of overpayment to be reclaimed to build in compensation on a rough and ready basis for any distress and inconvenience suffered by members or beneficiaries as a result of the overpayments and the recovery exercise. The Pensions Ombudsman has published useful guidance on the appropriate levels of redress for 'non-financial injustice'.
A few final thoughts
When it comes to overpayments, there a few important 'dos and don'ts' for trustees. To prevent further problems, as ever, trustees need to remain calm and avoid knee-jerk reactions, prepare a strategy for dealing with the issue promptly, communicate actively but clearly with members or beneficiaries (taking account of how communications will be received), and take advice where necessary to ensure the approach being taken would not attract criticism from the Pensions Ombudsman or the High Court. It is expected that trustees will be firm but fair with their members, but a cost-benefit analysis should always be considered and the right way forward will always depend on the wider circumstances of the case and the wider extent of the overpayment issue.