A decision made by the Deputy Pension Ombudsman (DPO) has highlighted the difficulties for trustees when trying to recover overpayments from members. The determination held that a trustee was time-barred from seeking the recovery of certain overpayments where they could have been discovered with reasonable diligence. Additionally, in beginning the recovery of the overpayment without the member’s agreement, it was held that the trustee had breached section 91 of the Pensions Act 1995, amounting to maladministration.
Mr Clift was a member of an industry-wide scheme who took early retirement on the grounds of ill health in April 1999. This included a tax free lump sum of £8478.47, and in May 1999, Mr Clift ordered a conservatory costing £11,200.
In June 1999 the scheme trustee discovered that an incorrect date had been used in relation to the calculation of pensionable salary for overtime, and so Mr Clift’s benefits had been overpaid. The trustees recouped the overpaid monthly pension sums by reduced pension payments. However, they decided not to recover the overpaid part of the lump sum, £3,876, on the basis that Mr Clift had relied on it and bought the conservatory.
It was not until August 2011 that the trustees discovered that another overpayment had been made relating to the calculation of his overtime earnings. This amounted to an overpayment of £587 for the lump sum and £2,209 pension overpayments. The trustees asked Mr Clift to agree to a 60 month repayment plan and his pension benefits were reduced. Mr Clift appealed under the scheme’s internal dispute resolution procedure, but was unsuccessful. He then referred the matter to the Pensions Ombudsman.
The Limitation Act 1980 gives the general rule that there is a six year limitation period for bringing claims to recover overpayments, calculated from the date that the overpayment is made. Where there has been deliberate concealment, fraud or mistake, the period can run from the date the claimant discovered the overpayment, or could have reasonably have been expected to have discovered it. The DPO held that this exception did not apply here, as a reasonably diligent trustee would have revealed the discrepancy either when Mr Clift’s benefits were first calculated, or in June 1999 when the first overpayment had been identified. The trustees were only allowed to attempt the recovery of payments made in the six years before they notified Mr Clift in August 2011.
The DPO held that the trustees were wrong to seek the second overpayment of the lump sum, £587. In June 1999 the trustees were satisfied that there was a causal link between the overpayment and the purchase of the conservatory; it is therefore illogical for the trustees to change their position and suggest that if the lump sum was even less, Mr Clift would have still made the purchase. On the other hand, the DPO did not accept Mr Clift’s defence that he had altered his position in relation to the overpaid monthly pension payments by spending more than he otherwise would have on take-away meals.
Mr Clift also argued that the trustees had breached section 91(1)(b) of the Pensions Act 1995, which provides that an entitlement to an occupational pension cannot be charged or subjected to a lien unless certain exceptions are met. The exceptions do not apply where the amount is disputed, unless there is a court order or arbitral awards requiring or allowing a charge or lien. The DPO held that by starting to recover the overpayment by reducing Mr Clift’s monthly payment without consent, and whilst the internal dispute procedure was ongoing, the trustees had contravened section 91 and accordingly their action amounted to maladministration.
This decision serves as a note of caution, highlighting the difficulties trustees can face in dealing with overpayments. With regards to the discovery of overpayments, the DPO said: “I would not … expect a “reasonably diligent” trustee to wait for a calculation to give “odd results” before fully understanding the rules and how the provisions of those rules should be applied. In my view the Trustees should carry out checks or audits on a regular basis to avoid such errors.” If trustees seek to recover overpayments by reducing pensions in payment, such action could amount to maladministration if done without the member’s consent and whilst in dispute. Furthermore, the legislation relating to limitation periods is complex. The case emphasises the importance of taking legal advice to establish the applicable limitation period and take prompt action before a claim is time barred.