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 focus on the Ombudsman’s new Annual Report, and a selection of recent determinations.
This is our first Pensions Ombudsman Update since CMS Cameron McKenna merged with Nabarro and Olswang on 1 May 2017, making CMS a top 6 global law firm. Our combination further enhances our ability to provide a market leading service to pension scheme clients. Please speak to any of the pensions team if you would like further information about our new firm.
Annual Report: taking stock
The main headline from Anthony Arter’s third Annual Report as Ombudsman is probably the continued rise in pension complaints, with TPO (the acronym now used for his office) handling over 6,000 enquiries (a rise of 22% on 2015/16). It also completed an increased number of investigations (1,404), although taking on slightly fewer (1,333) cases than the previous year. The average time taken to complete investigations is 10 months, although 40% were completed within six months, up from 25% in the previous year.
The Report records how the new approach for resolving disputes has continued to bed down, with some 70% now being informally resolved. Now, only 2% of complaints result in the most formal process which TPO deploys, a Determination following a Preliminary Decision: this is down from 8% last year and 27% just two years ago.
Pension liberation accounted for 8% of new investigations (the equivalent figure one year ago was 16%) but the Ombudsman observes an increase in complaints about transfers generally, and the clawback of overpaid benefits. Two-thirds of complaints determined by the Ombudsman or Deputy Ombudsman were rejected, with 20% being fully upheld and 13% partially upheld.
The Report mentions innovations unveiled this time last year. The April 2016 launch of TPO’s online application service has borne fruit, with 70% of all enquiries now received electronically. The Ombudsman also notes that no issues have arisen with publishing determinations in anonymised form, a practice therefore set to continue.
Last year, the Ombudsman decided to participate in selected appeals to the High Court, where there is a wider public interest. The Ombudsman confirms that he will continue to offer to help the Court in cases of legal uncertainty and says that even if not participating, TPO regularly attends hearings to assist the court with questions on TPO’s powers. However, aspects of the appeal process “could benefit from further refinement”: the Ombudsman is clearly frustrated that parties to appeals do not always provide him with updates on proceedings, which makes it hard for him to monitor the progress of appeals and to decide whether to participate. The Report gives an example of one appeal last year which TPO was not even aware of until the High Court handed down judgment.
Comment: The Report shows how the Ombudsman’s reforms to the investigation process, designed to shift the emphasis from formal determinations to informal, early-stage resolution, continue apace. However, in contrast with previous Reports, there are no procedural innovations this year. Instead, the focus in the next 12 months may well be coping with TPO’s steep rise in enquiries.
In PO-11695 Mr N (17 May 2017) the scheme trustee decided (having considered medical evidence) that the member’s ill-health pension should be suspended as his condition was not permanent, despite the trustee having decided in 2009 and 2012 that it was. The Ombudsman’s Adjudicator was unable to find evidence of any change in the member’s condition or proposed treatments since those assessments.
The trustee’s view was that because the relevant rule did not set out a particular test to apply on reviewing an incapacity pension, it had to look back to the same test it applied when the initial application was made. This included having regard to the “ill-health condition” under Finance Act 2004, which requires medical evidence that the member is (and will continue to be) incapable of carrying on his occupation because of physical or mental impairment, although as the Adjudicator noted there is no FA04 requirement for trustees to monitor whether a member continues to meet the ill-health condition once a pension is in payment.
The Deputy Ombudsman accepted that the scheme did not have to continue to pay an incapacity pension if this was no longer justified, but the trustee had to be able to point to a change in the member’s circumstances. The discretion to suspend was not an opportunity for the trustee to change its mind or interfere in its predecessors’ decisions.
There was an underlying principle that a pension, once in payment, was payable for life. A natural reading of a scheme rule providing discretion to vary, suspend or reinstate pension was one that looked for a rational basis for change. The trustee did not apply its mind to the specific question of whether it should remove the existing entitlement, but took an approach akin to requiring the member to make a fresh application for an incapacity pension. This was maladministration and the trustee was directed to re-consider the decision to suspend the pension.
Comment: This is not the first time that TPO has been guided by a purposive view of scheme rules dealing with ill-health. In PO-9309 Mrs R (10 June 2016) the Ombudsman opined that the starting position, where an employer had a discretion to pay a discretionary illhealth enhancement, should be to pay it: “The presumption must, therefore, be that the benefits will be paid if the member meets the eligibility criteria unless there is a cogent reason why this should not be.”
Where there’s a will…
In determination PO-14768 Mrs S (16 May 2017) the complainant already had a widow’s pension in payment from the scheme before marrying her second husband, Mr S (a member of the same scheme).
Mr & Mrs S both wrote separately to the scheme before their marriage and were each told that the first widow’s pension would be unaffected if and when the second widow’s pension came into payment. They married and Mr S later made a will which left half of his residual estate to his children, and the other half to Mrs S. On his death, Mrs S was told that the rules only allowed her one widow’s pension (the higher one), and not both.
Mrs S claimed that her husband would have made better provision for her in his will had they known the true position, citing the care taken to clarify the situation before marriage. She produced contemporaneous notes from the firm of solicitors involved in drafting the will, which commented that the provision made for Mrs S seemed fair “in view of her entitlement to his pension.”
However, the Ombudsman found insufficient evidence that Mr S would have drafted his will differently. Although Mrs S’s pension entitlement was discussed, it did not necessarily follow that Mr S would have granted more of his estate to Mrs S had he been aware of the correct position. It was equally plausible that Mr S did not wish to reduce the portion of his estate allocated to his children. That said, Mrs S should be awarded £1,000 for the significant distress caused: the £500 offered by the trustees was insufficient.
Comment: This was clearly a difficult case, but having gone to the trouble of persuading the solicitors to call their old files up from the archives, Mrs S might have hoped for a different outcome. In 81348/2 Wheeldon, five years ago, the former Ombudsman Tony King accepted a widow’s claim that the member would have drafted his will differently had he known the correct spouse's pension payable on his death, also reviewing evidence from the solicitor who had drafted the will. Indeed, Mr King said that the fact the member had specifically requested clarification of spouse benefits strongly supported the view that the level of his wife’s income on his death was a significant factor in his financial planning.
No maladministration where scheme not aware of urgency
Determination PO-13043 Mrs G (16 May 2017) was about a member who had started to make enquiries about transferring out of the Local Government Pension Scheme (LGPS), but failed to make a formal transfer request until after she was one year from her normal retirement date (NRD) of 65. The LGPS contained no power allowing a transfer to take place after that date. The member, who was terminally ill, had wanted to transfer to a SIPP to have more control over her benefits on death. She had not told the scheme of this at the time she requested information on transfer, although her representative said that her line manager was aware of her illness and that this should have triggered some sort of intervention.
On the member’s complaint the Ombudsman held that although there was maladministration in the scheme having failed to identify that the member was nearing NRD and informing her of the consequences, this had not caused financial loss. Essentially, even if the transfer had been made, her benefits would have been of an equivalent value; all she had suffered was a loss of expectation. And as she could have controlled her benefit by applying for a serious ill-health lump sum, transfer to a SIPP was not necessary to achieve her wish: “using a SIPP to do so was not appropriate when the Scheme provided a serious ill-health commutation option”. The Ombudsman was also of the view that given the seriousness of Mrs G’s illness the pension fund would have expedited a transfer request had it been fully aware of her circumstances.
Comment: It is implicit in this determination that had the scheme been aware of the member’s medical condition, it would have needed to act promptly. Alongside recent determinations on ensuring death benefits are paid within two years, it is a reminder that trustees should have procedures in place for accelerating urgent cases.
“Distress watch” latest
In our last Update we discussed the High Court decision in Baugniet v Capita Employee Benefits Ltd  EWHC 501 (Ch), in which the judge urged the Ombudsman to raise the long-established ‘ceiling’ for distress awards in nonexceptional cases from £1,000 to £1,600. Since Baugniet was handed down in March, we have seen an acceleration in the number of increased awards: there have been ten awards in the range £1,500-£2,000 (including one in which the Deputy Ombudsman awarded the new ‘magic number’ of £1,600). This follows a mere two awards over £1,000 in the previous two years.
At first glance, this would suggest that the Ombudsman has immediately acted upon the High Court’s entreaties. However, no determination expressly refers to the Court’s decision, and TPO has not updated the existing factsheet on awards. Moreover, no less than seven of the ten higher awards relate to a single “serial offender” respondent which has, at the time of writing, been the subject of some 18 separate determinations in a matter of months.
We had wondered whether the Annual Report would shed further light on the TPO approach post-Baugniet. However, although it summarises the case and the judge’s comments on quantum, the Ombudsman offers no further comment on the extent to which his office is formally revisiting its policy.
Comment: Whilst trustees might be wise to proceed on the basis that awards are increasing, the position is not, we think, yet set in stone
CMS and the Pensions Ombudsman
CMS has had a market-leading Pensions Ombudsman Unit for many years, led by Mark Grant. Mark wrote the only text book on the Ombudsman’s role and established and chairs the Pensions Ombudsman Liaison Group, an industry body that meets with the Ombudsman and seeks to improve understanding, relationships and communications between his office and key stakeholders.